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Herbert Smith Freehills | Getting Your Just Deserts

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Herbert Smith Freehills | Getting Your Just Deserts DISPUTE RESOLUTION This is the ninth in our CONTRACT DISPUTES PRACTICAL GUIDES series of contract ISSUE 9, NOVEMBER 2017 disputes practical guides, designed to provide clients with GETTING YOUR practical guidance on some key issues that feature in disputes JUST DESERTS: relating to commercial REMEDIES FOR BREACH contracts under English law. OF CONTRACT Establishing that a counterparty is in breach of contract is only the first hurdle to obtaining proper redress. It is just as important for the innocent party to show that it has suffered a loss as a result of the breach, and to prove what that loss is, or to establish that it should be entitled to some other remedy such as an injunction. Otherwise, the innocent party is likely to be awarded only nominal damages and may even be required to pay legal costs. Natasha Johnson, Rachel Lidgate and John Ogilvie consider the principal remedies available for breach of contract, focusing in particular on damages and how they are assessed, and provide some practical tips. (Note that liquidated damages / limitation and exclusion clauses were discussed in issue 6 of this series, so are not covered in this guide.) 02 HERBERT SMITH FREEHILLS 1. INTRODUCTION TOP TIPS IN RELATION TO The most common remedy for a breach of REMEDIES: contract is the award of damages. This is aimed, so far as possible, at putting the claimant in the ••When contracting, DO consider position it would have been in if the contract had been properly performed. Because of this, informing the counterparty of benefits obtained as a result of the breach must any unusual types of loss you be taken into account (see section 2 below). might suffer if there’s a breach ••DO consider the impact of The claimant will not be able to recover losses which it could have avoided by taking reasonable contractual termination rights on steps to mitigate its loss (see 3 below) or which any damages claim are seen in law as too remote or as otherwise falling outside the scope of the defendant’s ••DO consider agreeing terms liability (see 4 below). In some circumstances, relating to damages, but be damages may be reduced to take account of the mindful of the rules on penalties claimant’s own fault (see 5 below). and limitation clauses A claim for damages must be distinguished from a ••DO put in place a system of claim for payment of a debt. Where a party has recording losses and expenses performed its obligations and is entitled to caused by the breach payment of a fixed sum under the contract, that sum can be claimed as a debt. A claim in debt has ••DO keep a record of your significant advantages in that there is no need to attempts to mitigate prove actual loss and the various restrictions on recovery of damages, such as remoteness and ••DO consider how any mitigation, do not apply. post-breach transaction is structured, as that may affect As damages are essentially compensatory, the claimant must ordinarily show that the breach whether the benefits received caused the loss claimed. There are, however, reduce any damages payable some situations which are more difficult to fit into this analysis (see 6 and 7 below). ••DON’T forget specific performance or an injunction Apart from a claim in debt or damages, the may be available if damages innocent party may be awarded certain equitable would not be an adequate remedies, such as specific performance or an remedy injunction (see 8 below). GETTING YOUR JUST DESERTS 03 2. MEASURE OF DAMAGES A claimant can choose to claim damages on the basis of its reliance loss (ie wasted expenditure) Assuming there are no contractual provisions instead of its expectation loss. In some cases this regulating the measure of damages (see issue 6 of may be more straightforward, particularly where our contract disputes practical guides series: it is difficult to assess the value it would have Defining your liability in advance: Liquidated obtained under the contract. The claimant cannot damages, limitation and exclusion clauses) the use this route to recover more than it would have court will seek to determine the amount that will, received if the contract had been properly so far as possible, put the claimant in the position performed – so, for example, if the contract was it would have been in if the contract had been unprofitable so that the claimant wouldn’t have properly performed. recouped its expenditure in full, it will not be able to recover to that extent. But it is up to the Expectation vs reliance loss defendant to establish that. Precisely how damages will be calculated varies greatly depending on the type of contract and the circumstances. But in general terms, damages will “Damages are meant to put the be assessed by reference to the benefit the claimant back where it would have innocent party would have obtained from proper performance, less any gains received as a result of been if there had been no breach – the breach (eg costs saved by not having to no worse, but no better either” perform its side of the bargain). This is sometimes referred to as the claimant’s “expectation” loss. The claimant may also be able to recover costs As flagged above, where the claimant has wasted as a result of the breach (“reliance” loss), incurred wasted expenditure that has not already but there can be no double counting. To take two been taken into account calculating damages for examples: expectation loss, this can also be claimed. So in the example above where the supplier is in A buyer wrongly repudiates a contract for the breach, the buyer may have incurred costs supply of bespoke IT equipment just before the preparing for the installation – eg arranging site installation date. The supplier is (prima facie) access for the supplier’s workers. To the extent entitled to the price it would have been paid, such costs are wasted, they may be recoverable less any benefits resulting from the breach (eg in addition. labour costs saved). It cannot claim the wasted costs of manufacturing the IT equipment on top, Limited expectations as those costs are already taken into account. Where the defendant could have performed Say instead the supplier has wrongly repudiated the contract in a number of different ways, the the contract. The buyer is (prima facie) entitled court will assume that it would have performed to the value of the IT system, less any benefits in the least onerous manner open to it. That is resulting from the breach (eg not having to pay effectively the limit of the claimant’s further instalments). It cannot also reclaim expectation loss. instalments paid to date. 04 HERBERT SMITH FREEHILLS Difference in value vs cost of cure In Comau UK v Lotus Lightweight Structure Where the contract has been performed in part, [2014] EWHC 2122 (Comm), the claimant but badly, the question will often arise as to contracted to supply goods and services whether damages should be calculated by relating to the installation of a new product reference to the cost of putting it right, or line at the defendant’s car factory. The alternatively the difference in value between what defendant failed to pay certain invoices in the claimant obtained and what it should have line with an agreed payment schedule. The obtained, ie its loss of bargain. claimant terminated the contract and sought summary judgment together with The answer will normally depend on what it’s an interim payment of £500,000 in respect reasonable for the claimant to do in the of its claim for loss of profits going forward. circumstances. If it’s reasonable to insist on The High Court declined to award summary having the defect corrected, the claimant will judgment, saying the defendant had real normally be entitled to damages on that basis. prospects of successfully defending the Otherwise, it may only be entitled to claim the allegation that it was in repudiatory breach. difference in value. The judge noted that, if he had been persuaded on liability, he would not have awarded any interim payment as it appeared “As in many contexts, reasonableness the claimant would not be awarded more than nominal damages in any event. has a part to play. If the cost of curing a breach is wholly disproportionate, Under clause 12.5 of agreement, if the the claimant may only be able to defendant had not been in breach of its payment obligations, it would have been recover the difference in value” entitled to terminate the contract on immediate notice. Any damages would therefore be calculated on the assumption The classic illustration of this point comes that, if it hadn’t been in breach of contract, from Ruxley v Forsyth [1996] AC 344. The the defendant would have exercised its defendant had contracted to install a rights under clause 12.5 to reduce its swimming pool on the claimant’s property. liability to the claimant. The pool was to be 7’ 6” deep but, as built, its maximum depth was only 6’ 9”. The Any other assumption would, the court difference in value was found to be nil, said, ignore the limited nature of the whereas the cost of rebuilding the pool to claimant’s “expectation interest”, ie that it the desired depth would have been £21,560. was only ever entitled to such profit as it might have gained prior to any “termination The House of Lords refused to award the for convenience”. If clause 12.5 was ignored cost of rebuilding the pool. The judge had when assessing damages, the effect would found that this cost was wholly be to give the claimant the benefit of a disproportionate to any prospective benefit, better bargain than it actually made.
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