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 . 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 .

Otherwise, the innocent party is likely to be awarded only nominal 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 / 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 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. and so was unreasonable. GETTING YOUR JUST DESERTS 05

Relevance of available market SALE OF GOODS ACT 1979 One factor that is often important in assessing damages is whether or not there is an available Section 50. Damages for non-acceptance. market for the goods or services which form the Where the buyer wrongfully neglects or subject matter of the contract. If there is, the refuses to accept and pay for the goods, innocent party will generally be expected to the seller may maintain an action against take advantage of that market, for example to sell him for damages for non-acceptance. the goods (if the buyer has wrongly rejected them) or buy replacements (if the seller has The measure of damages is the estimated failed to supply). loss directly and naturally resulting, in the ordinary course of events, from the In these circumstances, the claimant’s damages buyer’s breach of contract. will generally be limited to the difference between Where there is an available market for the the contract price and the market price on the goods in question the measure of date the cause of action arose (plus any additional damages is prima facie to be ascertained expenses incurred in having to go to the market). by the difference between the contract That will be so whether or not the claimant has price and the market or current price at in fact taken advantage of the market in question. the time or times when the goods ought to This is sometimes referred to as the “breach have been accepted or (if no time was date rule”, and it is reflected in the provisions fixed for acceptance) at the time of the relating to damages for non-acceptance or refusal to accept. non-delivery under the Sale of Goods Act 1979 set out to the right. Section 51. Damages for non-delivery. Where the seller wrongfully neglects or The expectation that the buyer will take refuses to deliver the goods to the buyer, advantage of an available market ties in with the the buyer may maintain an action against principles relating to mitigation, discussed at the seller for damages for non-delivery. section 3 below. If the innocent party had made a bad bargain, so that the market price is actually The measure of damages is the estimated more advantageous than the contract price (ie loss directly and naturally resulting, in the higher, if the claimant is the seller, or lower, if the ordinary course of events, from the seller’s buyer), then there is generally no loss – other than breach of contract. perhaps expenses. Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained “Where there’s an available market, by“If the work difference has between to start the contract calculating the claimant’s loss of pricebefore and the full market terms or current can price of bargain (if any) should be the begoods agreed, at the time make or times sure when they ought to have been delivered or (if no time straightforward – it is simply a wasyou’ve fixed) at got the timea clear of the refusal to comparison of the contract price deliver.interim agreement – with the market price” and extend it as needed” 06 HERBERT SMITH FREEHILLS

If there is no available market for the goods or services in question, then the assessment of Hughes v Pendragon Sabre Ltd [2016] EWCA damages for loss of bargain may be trickier. Some Civ 18 gives an example of how the court examples from the sale of goods context may help approached the assessment of damages to illustrate: where there was no available market. In that case, the Court of Appeal found that the ••If a buyer has wrongly rejected goods, and there defendant car dealer was in breach of a is no ready market, the seller will ordinarily be collateral contract to sell a limited-edition entitled to the contract price less any value in Porsche to the claimant if the defendant was the goods retained. That value might be allocated one of the vehicles. evidenced, for example, by the price the seller has managed to achieve in an alternative sale, or The court noted that the “breach date rule”, by sale prices achieved for reasonably similar as reflected in section 51(3) of the Sale of goods. Goods Act, applied only when there was an available market in the goods. That meant ••If a seller has failed to supply goods, and the the goods were available and freely sold, with buyer can’t obtain substitute goods in the the price being settled by the of supply market, the buyer will ordinarily be entitled to and demand. In this case, the goods were so the value of the goods at the time of the breach specialised that there was not sufficient less the contract price. Again, in assessing activity to evidence a market. Only about 30 value, the court may look to actual sale prices of the relevant models had been supplied to achieved around the relevant time. the UK, and the parties’ experts had not been The claimant may be entitled to further damages, able to find one for sale. not limited to loss of bargain, depending on the circumstances. If for example a seller has failed to Accordingly, the damages had to be assessed supply goods, and the buyer has lost out by not according to the value of the goods at the being able to use those goods in its business, it time of the breach, on the best available may be able to claim for that loss (subject to the evidence. Although the evidence about the rules on remoteness discussed below). This cost of the nearest equivalent vehicle was should only arise, however, if there is no available “deficient”, given the illiquid market, it market – where there is an available market, the seemed certain that the value of the vehicles buyer will normally be able to take advantage of had appreciated and the resale value was in that market to source replacement goods and excess of the price as new. curtail any further losses. Since the claimant had produced evidence of similar vehicles with asking prices of some £170,000, and the other evidence was “not significantly inconsistent” with it, the court “The breach date rule is just a starting adopted that figure. Deducting £135,000, which it found would have been the contract point; it will be overridden where it price, the court awarded damages of does not properly compensate for the £35,000. breach” GETTING YOUR JUST DESERTS 07

Overriding compensatory principle In The Golden Victory [2007] 2 AC 535, a The breach date rule provides the starting point charterer repudiated a seven-year time for the assessment of damages, but it may be charter four years early but only 14 months displaced where necessary to compensate the before it would have been cancelled in any claimant appropriately for the loss suffered. This event under a war clause. is sometimes referred to as the “overriding compensatory principle”. The majority of the House of Lords held that in assessing damages for the repudiation, it was So, for instance, the damages may be reduced if necessary to take account of events after the events which occurred after the date of the breach repudiation if they meant the contract would show the innocent party would have suffered the have been lawfully terminated before the end same loss (or a substantial part of it) in any event. of the contract term. So damages were to be See examples to the right. assessed on the assumption that the charter would have lasted another 14 months. The principle has also been applied to increase a claimant’s damages, where the defendant’s conduct after the breach means the breach date rule does not give the appropriate measure of In Bunge SA v Nidera BV [2015] UKSC 43 damages. An example is given below. (considered here on our Litigation Notes blog), the claimant contracted with the defendant to buy Russian wheat for shipment In Lakatamia Shipping Co Ltd v Nobu Su/Hsin between 23 and 30 August 2010. The Chi Su [2014] EWHC 3611 (Comm), the contract provided for cancellation in the defendants failed to repurchase forward event of relevant export restrictions being freight agreement (FFA) positions on the imposed. On 5 August, Russia introduced an date agreed under the contract. The embargo on wheat exports starting on 15 defendants argued that damages should be August, and on 9 August the sellers limited to the difference between the purported to cancel the contract. contract and market value of the relevant FFA positions at the date the repurchase should By the time of the appeal to the Supreme have taken place. Court, it was common ground that the sellers were not entitled to cancel at that stage, as The court disagreed, on the basis that the the embargo had not yet commenced. So the defendants repeatedly assured the claimants contract had come to an end as a result of the that they would complete the repurchase, and sellers’ renunciation. However, the Supreme so had encouraged the claimants not to take Court held that the buyers had suffered no advantage of the available market to sell the loss because shipment would have been goods. That meant they could not argue that subject to the export ban in any event. the damages should be assessed on the basis of such a sale taking place on the date of breach. The prima facie rule had to give way to the overriding compensatory principle. 08 HERBERT SMITH FREEHILLS

DECISION TREE: DO YOU HAVE A BINDING CONTRACT?

Collateral benefits In Globalia Business Travel v Fulton Shipping It is not always easy to determine whether a [2017] UKSC 43 (outlined here) the benefit obtained by the innocent party must be defendant charterers had claimed to be taken into account to reduce the damages payable entitled to redeliver the claimants’ vessel following a breach of contract, or alternatively will some two years early. The owners treated be treated as a collateral benefit which is ignored this as a repudiatory breach, which they for these purposes. accepted as terminating the charterparty. They went on to sell the vessel for almost The key question is whether the benefit was US$24 million just prior to its redelivery. caused by the breach. This is not simply a “but for” test; it is not sufficient that the benefit would The arbitrator found that, at the end of the not have been obtained but for the breach. Nor is charterparty two years later (following the it sufficient if the breach merely provided the global financial crisis), the vessel would occasion for the innocent party to obtain the have been worth US$7 million. benefit. Determining causation in this sense is not a straightforward question; it will depend on all The question was whether, in the owners’ the circumstances. Two recent Supreme Court claim for loss of earnings, they had to give decisions illustrate the difficulty. credit for the benefit obtained in selling the vessel early. After differing decisions by the arbitrators, the High Court and the Court of In Lowick Rose LLP v Swynson Ltd [2017] Appeal, the Supreme Court ultimately UKSC 32 (considered here) the Supreme found in favour of the owners. Court held , overturning the Court of Appeal decision, that the loss suffered by a For the benefit to be brought into account, it lender due to its accountants’ breach of must have been caused either by the breach duty was extinguished when the loan was or by a successful act of mitigation. On the repaid by the borrower. facts of this case, it was not caused by the breach. The termination was merely the The repayment had been funded by the occasion for selling the vessel; it could have lender’s indirect owner, who had acquired been sold during the term of the an interest in the borrower. The Court of charterparty. Nor was it a successful act of Appeal and Supreme Court agreed that if mitigation, as it was incapable of securing an the owner had provided funds directly to alternative income stream. the lender, to make up the shortfall caused by the borrower’s failure to repay the loan, The decision to sell the vessel was the this would have been a collateral payment owners’ commercial decision, taken at their that should be ignored in assessing own risk. It had nothing to do with the damages. However, in the Supreme Court’s charterers. If the market value had risen, view, since the repayment was made by the the owners could not have claimed the borrower, it could not be regarded as difference from the charterers; they equally collateral. The fact that the funds came could not be required to bring into account from the owner was not relevant. the benefit gained by the fall in value. GETTING YOUR JUST DESERTS 09

3. MITIGATION In Manton Hire v Ash Manor Cheese [2014] A party that is in breach of contract will not be EWCA Civ 548 (considered here), the liable for losses that the innocent party could defendant supplied a reach forklift truck have avoided by taking reasonable steps to for the claimant to use in its warehouses. mitigate its loss. The defendant’s representative attended the claimant’s site to take measurements This is sometimes referred to as the claimant’s of its racking arrangements. The model duty to mitigate, though that is a bit of a misnomer. supplied was one of two that it The claimant is under no duty to take reasonable recommended as suitable. steps; it simply will not be able to recover any losses it could have avoided by doing so. After delivery, the claimant discovered that the forklift did not fit within the racking, and The question of what steps are reasonable is took the view that it was not fit for purpose. necessarily fact-sensitive. In some cases, for The defendant proposed to remove the example, the innocent party may be required to truck and have it modified to correct the negotiate with the party in breach, eg to put right problem. The claimant expressed various the defective performance. However, the onus is concerns including as to whether the on the defendant to show that the claimant failed proposed modifications would comply with to act reasonably. The standard of what is relevant legislation and regulations. reasonable for these purposes is not a high one. Discussions broke down and the claimant rejected the forklift. The claimant will also be able to recover the costs or losses incurred as a result of taking reasonable The Court of Appeal rejected the defendant’s steps to mitigate – even if those steps turn out to argument that the claimant had failed to have increased the loss overall. Where a party has mitigate. The defendant had not put forward successfully taken steps to mitigate its loss, the an offer that the claimant could reasonably damages recoverable will be reduced accordingly. have been expected to accept. The position may have been different if the defendant had put forward a detailed proposal supported by a proper specification and drawings, as well In Bacciottini v Gotelee and Goldsmith [2016] as information as to how the relevant EWCA Civ (considered here), the Court of legislative and regulatory requirements Appeal upheld an award of only £250 in would be met. damages for the defendant solicitors’ failure to identify a relevant planning restriction The court pointed out that the defendant was affecting the claimants’ residential the expert in the field, and so it was for the purchase. The claimants had mitigated their defendant to satisfy the claimant that its loss by successfully applying to remove the proposal was lawful and that it could deliver restriction, and so could recover only the its proposed solution. In the circumstances, costs of the application. the claimant had not acted unreasonably. 10 HERBERT SMITH FREEHILLS

4. REMOTENESS The classic illustration is the case of Victoria A claimant may not be able to recover some types Laundry (Windsor) Ltd v Newman Industries of loss, even though they have been caused by the Ltd [1949] 2 KB 528. The defendants delayed defendant’s breach, because they are regarded by in delivering a large boiler to the claimant the law as too remote. The standard test of laundry. The Court of Appeal held that the remoteness in contract was established in the claimant could recover its “normal” loss of classic case of Hadley v Baxendale (1854) 9 Ex 341. profits resulting from the delay; the This provides, in broad summary, that losses will defendants knew the claimant was a laundry be recoverable if they fall within one of two and wanted the boiler for immediate use, so “limbs”: could reasonably have foreseen that the losses arising naturally, in the usual course of delay would lead to a loss of business. things, from the breach itself; and But the claimant could not recover its loss of losses arising from special circumstances profits on certain particularly lucrative dyeing known to both parties at the time of the contracts the claimant could have entered contract. into, as that was a special circumstance that was not within the defendant’s knowledge. Where a loss arises from special circumstances that were not drawn to the defendant’s attention at the time of contracting, it will not be recoverable. In some cases, even though the traditional test The essence of the rule is that the defendant might lead to a conclusion that a type of loss was should not be held liable for types of loss which, not too remote, the claimant may still be denied at the time of the contract, a reasonable person in recovery on the basis that the defendant cannot his position would not have foreseen as likely to reasonably be regarded as having assumed result from a breach. responsibility for losses of that kind. This is the alternative approach which arises So, if a seller has failed to deliver some item that from the House of Lords decision in Transfield v the buyer intends to use profitably in its business, Mercator (The Achilleas) [2008] UKHL 48. the seller is likely to be liable for the resulting loss It seems, however, that this approach will only of profits – at least so long as it was within the apply in unusual circumstances. seller’s reasonable contemplation that the item in question might be used to make a profit. But if the buyer loses out on an unusually lucrative contract, that may (depending on the circumstances) be seen as a separate type of loss “A loss will not be recoverable if the which arises from special circumstances. If so, it defendant couldn’t be expected to will be too remote to recover unless the seller has been informed of the relevant circumstances. have foreseen it and didn’t assume reasonability for it” GETTING YOUR JUST DESERTS 11

In The Achilleas (considered here), the In John Grimes Partnership v Gubbins [2013] defendant chartered a vessel from the EWCA Civ 37 (outlined here), a breach of claimant at a (final) daily rate of US$16,750. contract by JGP (an engineering firm) led to a Before the agreed date for redelivery, the 15 month delay in completion of G’s claimant agreed a new four to six month residential development. The Court of charter with a third party at a daily rate of Appeal upheld an award of damages for the US$39,500. decline in value of the development during the period of the delay. The defendant was nine days late redelivering the vessel, which meant the The court rejected JGP’s argument that it third party would have been entitled to could not be said to have accepted cancel the new charter. By that time market responsibility for loss arising from a rates had fallen, so the claimant agreed to . There was nothing to reduce the daily rate to £31,500. take the case out of the conventional The claimant claimed the US$8,000 per approach to remoteness of damage in day reduction for the whole period of the contract, ie the Hadley v Baxendale approach. new charter (nearly £1.4 million). The defendant argued that the claim should be The judge had considered whether losses limited to the difference between the arising from movement in the property market rate and the existing charter rate for market were reasonably foreseeable at the the nine day period during which the time of the contract as a consequence of any claimant couldn’t use the vessel (about delay by JGP, and had concluded that they £160,000). were.

The House of Lords held in favour of the There had been no evidence before him to defendant. Lord Hoffmann and Lord Hope show that there was some general reached their decision on the basis that the understanding or expectation in the property further losses, though not unlikely to occur, world that a party in JGP’s position would not were not losses for which the defendant be taken to have assumed responsibility for had assumed responsibility. This was for a losses arising from movement in the market. number of reasons, including the accepted This could be contrasted with the facts of The practice in the charter market that damages Achilleas itself where it was found that there for late redelivery were calculated as the was a general expectation that a charterer difference between the market rate and the who returned a vessel late was liable in charter rate for the period of late delivery. damages only for the period of late delivery Lord Hoffmann did, however, make clear and not for losses incurred through the that the traditional Hadley v Baxendale test owners losing a follow-on charter. The fact was the starting point and the assumption that a loss was suffered because of a change of responsibility test should only be used in market values during the wrongful delay where the circumstances require it. did not render the case out of the ordinary. 12 HERBERT SMITH FREEHILLS

5. CONTRIBUTORY NEGLIGENCE 6. LOSS OF A CHANCE Section 1(1) of the Law Reform (Contributory Where the claimant’s loss depends, not on what Negligence) Act 1945 provides that, where a it would have done, but on the hypothetical acts person suffers damage “as a result partly of his of a third party, the court may award damages for own fault and partly of the fault of any other the “loss of a chance”. This approach has been person”, the damages recoverable shall be adopted in cases involving such varied matters as reduced “to such extent as the court thinks just the lost chance to participate in a beauty contest, and equitable having regard to the claimant’s the lost chance to negotiate better terms in a share in responsibility for the damage”. property transaction, and the lost chance to bring a successful claim in litigation. This provision is primarily aimed at claims in the tort of negligence. However, where the claimant The claimant first needs to prove causation – ie would have had a claim against the defendant in that on the balance of probabilities there was a negligence for the same conduct that amounts to real or substantial chance that the third party the breach of contract, the defendant may would have acted in a way that meant the equally be entitled to rely on contributory claimant would gain some benefit, or avoid some negligence in defending the contract claim. This loss. The chance need not be more than 50%, may arise for example in professional negligence but it cannot be merely speculative. If causation claims. The rationale is that, where the claimant is proved, the court will go on to quantify is partly at fault, it should not be able to prevent damages, applying the relevant percentage the defendant relying on the defence of chance to the value of the benefit that could have contributory negligence by bringing the claim been gained, or loss avoided. only in contract, rather than tort. The question of whether a “loss of a chance” The question of whether or not the claimant is approach favours the claimant or defendant considered to be at fault, for the purposes of a varies depending on the facts of a particular case. contributory negligence defence, will depend on Such an approach may allow a claimant to what is expected of the particular claimant in the recover damages, even though it cannot prove particular circumstances. So, for example, in the loss on the balance of probabilities. Equally, context of a solicitors’ negligence claim, a however, it may mean that a claimant is unable to sophisticated corporate client with in-house recover in full, despite having proved loss on the lawyers might be expected to pick up matters balance of probabilities. which an ordinary individual client would not. The court may not apply a “loss of chance” Where the court finds that the claimant was approach in valuing an asset the claimant has partly at fault, the extent of the reduction in lost, even if the value depends on the damages will depend on an assessment of what hypothetical acts of a third party (eg an is just and equitable having regard to the parties’ independent valuer). respective responsibility for the damage. That may be very difficult to predict. GETTING YOUR JUST DESERTS 13

In Law Debenture Trust Corporation PLC v In Anthony McGill v Sports & Entertainment Elektrim SA [2010] EWCA Civ 1142 Media Group [2016] EWCA Civ 1063, the (considered here) the court had to assess claimant football agent brought a claim the value of a lost chance of obtaining a against a rival agency for inducing a player to contingent payment, which would have breach his oral contract with the claimant. been calculated according to a formula The claimant claimed damages for the lost based on the “fair market value” of chance of earning commission on the player’s Elektrim’s assets as determined by two transfer from Aston Villa to Bolton. leading investment banks. Under the relevant FA regulations, the A key element in the valuation of Elektrim’s claimant would not have been able to obtain assets was the value of its shareholding in a payment of commission unless he had company that was subject to a long running entered into a written agreement with the ownership dispute. The judge held that the player before the transfer concluded; an oral approach taken by the notional investment contract was not sufficient. bankers in valuing the shareholding would have depended critically on the legal advice The High Court dismissed the claim on the they had received. He made findings as to basis that the claimant had not established, what that advice would have said and the on the balance of probabilities, that the player assessment the bankers would have reached. would have entered into a written agreement The Court of Appeal endorsed the judge’s so as to allow the claimant to claim his approach, commenting that the case was promised commission. quite different from cases that depended significantly on non-legal factors such as The Court of Appeal overturned that the outcome of a beauty contest or decision. It held that the claimant could commercial negotiations. Here the court recover damages for the lost chance of had to assess what a banker would have earning commission, even though he could concluded as to the valuation of certain not establish more than a 50% chance that shares. It said that where something of the player would have entered into a written value has been lost, “the court must do its agreement. There was a real or substantial best to estimate that value and should not chance that he would have done so, had the too readily decide that it is a matter of rival agent not interfered, and so the lost chance what the true value of something as chance should have been assessed on a concrete as a share is likely to be”. percentage basis.

The court rejected the submission that it The case was remitted to the High Court to should have considered the various possible determine the value of the lost chance, which conclusions the bankers might have reached could not (in light of the judge’s finding on the and assessed the chance of each. Such an balance of probabilities) be more than 50%. approach was “over-complicated” and no more likely to achieve an accurate result. 14 HERBERT SMITH FREEHILLS

7. LICENCE FEE DAMAGES In Morris-Garner v One Step (Support) Ltd In some cases, instead of awarding damages [2016] EWCA Civ 180, the defendants sold calculated on the conventional basis, the court the claimant their business providing may award so-called “licence fee damages”, “supported living” services for children calculated as the sum which might reasonably leaving care and vulnerable adults. The have been negotiated between the claimant and defendants subsequently breached the defendant if the defendant had sought the non-compete and non-solicitation clauses claimant’s permission to do what it has in the sale agreement by setting up a (wrongfully) done. competing business. Such damages are sometimes referred to as The judge gave the claimant the option to “Wrotham Park damages” after the classic case elect (as it did) for licence fee damages. which established the remedy, Wrotham Park The Court of Appeal upheld that decision. Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR It rejected the defendant’s argument that 798. In that case the defendant built 14 houses licence fee damages can be awarded only on a parcel of land, in breach of a restrictive where the injured party is unable to covenant which prevented it building on the land demonstrate identifiable financial loss, and unless approved by the claimant (which owned where to do so is necessary to avoid the adjoining estate). It was conceded that the manifest injustice. It concluded that the value of the estate was not diminished by the question for the court is whether it is just development, and so a conventional damages to award licence fee damages in the award would not have provided a remedy. The particular case. court declined to grant a mandatory injunction to pull down the houses, as it would have been a The Court of Appeal said that the judge was waste of badly needed housing. Instead it entitled to take into account the difficulties awarded a sum which the claimant might the claimant would have in establishing reasonably have demanded for relaxing the damages on the ordinary basis, in particular covenant to allow the development, assessed at in showing what placements it had lost or 5% of the defendant’s anticipated profits. might have lost because of the competing business, and in measuring any loss of The precise circumstances in which licence fee goodwill. damages will be awarded remain a matter of some debate in the case law. It seems the key The Supreme Court heard an appeal question is whether justice requires such an against this decision in October 2017. award. An inability to establish damages on the Judgment is awaited. conventional basis will be a relevant factor, but it is not necessarily a pre-requisite.

In exceptional circumstances, the court may award an account of profits as a remedy for breach of contract, but this is very rare and is not considered further in this guide. GETTING YOUR JUST DESERTS 15

8. EQUITABLE REMEDIES In AB v CD [2014] EWCA Civ 229 In some circumstances, the court may award a (considered here), the claimant sought an non-financial remedy, in particular: interim injunction to restrain the defendant Specific performance: an order compelling a from terminating a licensing agreement party to perform its contractual obligations (ie pending the determination of the claimant’s other than the payment of money – that would claims in arbitration proceedings. The be simply a debt claim). licensing agreement contained a contractual limitation on the heads of loss that would be An injunction: typically, an order compelling a compensated in damages. party to refrain from doing something that would be a breach of contract (a “prohibitory” The Court of Appeal granted the injunction, injunction). Less usually, an injunction may finding that damages would not be an require a party to take positive action, eg to put due to the limitation clause right a breach (a “mandatory” injunction). in the contract. It held that, while the These are referred to as “equitable remedies” as, agreement of the parties concerning the historically, they were available only from the quantification of damages is conclusive in the courts of equity rather than common law. These context of a claim for damages, it is not remedies are at the court’s discretion. conclusive in a claim for an injunction which is designed to avoid any cause to claim such The court will grant an only if damages. damages would not be an adequate remedy. So, for example, it will not grant specific performance However, the court was keen to emphasise of a contract to supply commoditised goods, but that its decision did not mean an injunction may do so for a contract to sell a particular piece would be granted in all such cases. of land, as that is unique and not capable of Establishing that damages would not be an substitution. Damages may also be considered adequate remedy merely allows the court to inadequate where they are very difficult to exercise its discretion as to whether an quantify, or where they are restricted by an injunction should be granted. In exercising exclusion clause. that discretion, the fact that the restriction in question was agreed, and the likelihood and scale of any shortfall in the claimant’s “Orders for the payment of a debt or compensation as a result of it, may be damages are the most common relevant. remedy for a breach of contract, but they are not the only one. In some circumstances, the court may compel a party to perform its obligations, or refrain from breaching them, or to put right a past breach” 16 HERBERT SMITH FREEHILLS

CONTACTS

Natasha Johnson Rachel Lidgate John Ogilvie T +44 20 7466 2981 T +44 20 7466 2481 T +44 20 7466 2359 M +44 7809 200 331 M +44 7809 200 382 M +44 7795 396 517 [email protected] [email protected] [email protected]

Natasha is a partner in the Rachel is a partner and solicitor John is a partner in dispute dispute resolution team in advocate in the firm’s dispute resolution. He acts for our London office. With resolution division in London. commercial clients across a experience in a wide spectrum She helps clients in relation to wide range of complex of commercial disputes across a broad range of commercial contentious issues occurring a range of sectors including disputes, with a particular in the United Kingdom and manufacturing, private equity focus on clients in the energy emerging markets, and professional and financial and TMT sectors. Rachel has particularly Africa. services. extensive experience of High Court litigation, international John has advised on general Natasha has a wealth of arbitration, expert commercial disputes and experience advising on matters determination and mediation. international corporate merger involving allegations of breach and acquisition transactions, of contract and negligence, She has over 10 years’ mining and energy projects, particularly in the financial experience in advising clients professional negligence, and services sector. She also has in the oil, gas and power media related disputes. Most experience in the field of industries on contractual and notably, he has advised major Commercial Agency. other disputes. She also has corporations on multi-billion significant experience in acting pound transactions. on IT disputes relating to complex outsourcing, systems integration and data management projects.

The contents of this publication, current at 7 November 2017 , are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. ©Herbert Smith Freehills LLP 2017. GETTING YOUR JUST DESERTS 17

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