Breach of Contract?
Written by Izaz Ali on 08 August 2007« Return to Reading Room
A breach of contract will result in, amongst other remedies, damages to put the claimant in the position he would have been in had the contract been performed.
The main test for loss in contract is expectation loss but in some circumstances the tests of reliance loss or restitutionary damages may be used. In the circumstances set out in this case, expectation loss seems to be relevant.
Damages in contract seek to put the injured party in the position he would have been in had the contract been performed satisfactorily (expectation loss) (Robinson v Harman (1848) 1 Ex 850) (that is, the innocent party may seek to recover profits which he expected to receive had the contract been performed; he is entitled to damages for loss of bargain).
Damages for breach of contract- sometimes losses will be viewed as too remote to be recoverable, sometimes there will not be a sufficiently strong casual connection between the breach and the loss, the claimant may have failed to mitigate his loss or he may have suffered loss partly as a result of his own fault. Remoteness, causation, mitigation and contributory negligence are methods by which damages may be limited.
Remoteness in contract. For contract the test of remoteness is set out in Hadley v Baxendale (1854) 9 Ex 341. Under this test, the claimant will be able to recover:
Losses arising naturally, according to the normal course of things, from the breach of contract itself; or such loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a probable result of the breach.
The first limb of the test is objective and refers to so-called general damages. This test is concerned with what a reasonable man should know to be the “ordinary course of things” (Victoria Laundry v Newman Industries  2 KB 528); what is within the reasonable contemplation (The Heron II  1 AC 350). This will be a question of fact in the circumstances. The terms “direct loss and/or damage” and “direct loss” refer to losses which fall within this first limb.
The second limb of the test covers knowledge of special circumstances outside the ordinary course of things. The question is what could have reasonably been contemplated by the party in breach with knowledge of the special circumstances. Knowledge of special circumstances may be derived from the innocent party or from other sources, for example, independent information about the innocent party’s business or about the existence of a particular market may suffice.
The second limb covers so-called “special damages” and makes additional losses recoverable.
The issues of remoteness and limitation on liability in damages were discussed in a recent House of Lords decision (Jackson v Royal Bank of Scotland  UKHL 3). In this case, the court confirmed that for the purposes of the test in Hadley v Baxendale it is the date of making the contract and not the date of breach which is the relevant date for applying the test, because at the point of making the contract the parties have the opportunity to limit their liability in damages. If, when entering a contract, a party has set no limit on its liability in damages for breach of contract, there is no arbitrary limit that can be set to the amount of the damages once the test of remoteness according to one or other of the rules in Hadley v Baxendale has been satisfied; and the only limit to its liability come when the question whether any loss has been sustained has become too speculative to permit the making of any award of damages.
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