Revise Common law for Cambridge 9084 (3.4.1)

The fundamental principle governing the award of damages for breach of contract is to compensate the innocent party, not to punish the party in breach. This is known as the expectation loss or 'loss of bargain' principle. Its classic formulation comes from Baron Parke in Robinson v Harman (1848), who stated that the aim is to place the claimant, so far as money can do it, in the same situation as if the contract had been performed. This forward-looking measure seeks to give the claimant the value of the performance they were promised but did not receive. It can cover various losses, including lost profits, the cost of rectifying defective work, or the difference in value between what was supplied and what was promised.

Sometimes, it is impossible or too speculative for a claimant to prove what their profit or 'expectation' would have been. In such cases, the court may allow the claimant to claim for reliance loss instead. This backward-looking measure aims to put the claimant in the position they were in before the contract was made, by compensating them for expenses incurred in reliance on the contract being performed. A key case is Anglia Television v Reed (1972), where a TV company hired an actor who then repudiated the contract. The company could not prove what profit the film would have made, so they instead successfully claimed for their wasted expenditure, such as the costs of the director, designer, and studio hire. A claimant cannot claim both expectation and reliance loss for the same expenditure; they must choose one.

In cases of defective performance, the court must decide how to quantify the expectation loss. The two main measures are 'cost of cure' and 'diminution in value'. Cost of cure is the expense of putting the work right and is the usual measure. Diminution in value is the difference between the value of the performance contracted for and the value of the performance actually received. The case of Ruxley Electronics and Construction Ltd v Forsyth (1996) is the leading authority. The House of Lords held that where the cost of cure is wholly disproportionate to the benefit to be obtained, the court will not award it. In Ruxley, the cost of rebuilding a swimming pool to the correct depth was unreasonable, so the court awarded a smaller sum for 'loss of amenity' instead of the full cost of cure.

As a general rule, damages are not awarded in commercial contracts for non-pecuniary (non-financial) losses such as mental distress, disappointment, or hurt feelings. However, there are exceptions. The main exception is where a major object of the contract was to provide pleasure, relaxation, or peace of mind. In Jarvis v Swans Tours (1973), Mr Jarvis was awarded damages for the disappointment and loss of enjoyment from a disastrous skiing holiday that failed to live up to its brochure description. Similarly, in Farley v Skinner (2001), a homebuyer was awarded damages for the distress caused by aircraft noise after his surveyor negligently failed to report it, because a specific object of his instruction to the surveyor was to ensure a peaceful and quiet property. The 'loss of amenity' award in Ruxley v Forsyth is another example of the court compensating for non-financial disappointment.

A claimant cannot recover for all losses flowing from a breach; a line must be drawn for policy reasons. The test for remoteness determines which losses are legally recoverable. The foundational rules were established in Hadley v Baxendale (1854). The test has two limbs: first, losses that arise naturally, 'according to the usual course of things', from the breach are recoverable. Second, losses that may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach, are also recoverable. This second limb requires the defendant to have had actual knowledge of special circumstances. The case of Victoria Laundry v Newman Industries (1949) refined this, confirming that for unusual profits (e.g., from a lucrative government contract) to be claimable, the defendant must have had knowledge of the specific circumstances.

Once a breach has occurred, the law imposes a duty on the claimant to take all reasonable steps to mitigate (minimise) their loss. A claimant cannot recover damages for losses which they could have avoided by taking reasonable action. What constitutes 'reasonable' depends on the circumstances of the case. For example, in Brace v Calder (1895), a wrongfully dismissed manager was offered similar employment by the new partnership and his refusal was deemed unreasonable, reducing his damages. The burden of proof is on the defendant to show that the claimant failed to mitigate. Importantly, the claimant can recover any expenses reasonably incurred in the process of attempting to mitigate, even if the attempt is unsuccessful.