Comparative analysis of some aspects of assessment of damages for contractual breaches in England and Wales, Australia and New Zealand

• Author: Maree Chetwin
• Position: College of Business and Economics, University of Canterbury, Christchurch, New Zealand

1 Introduction

Parties entering a contract are entitled to create mutual rights and duties by agreement. “What the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts”¹. If there is a dispute between the parties as to what is covered and the matter turns on the wording of the contract, there will be variations between jurisdictions depending on the issue in dispute. There is a wide variety of agreed remedies and the main types relate to financial payments. Despite the general principle of freedom of contract, there are various rules that involve a balancing of values, and relief is given on the basis of fairness. This is evident in relation to the penalty clause jurisdiction. Of major importance in commercial contracts are liability provisions which can be contentious. An exclusion clause limits a party's liability and for that reason it is likely to be carefully negotiated. However, in most commercial contracts “the value of protecting the weak, the foolish, and the thoughtless from imposition and oppression” ( Waddams, 1976 ) is generally irrelevant. This paper considers aspects of the efficacy of these agreed remedies in protecting a party's contract interests in England and Wales, Australia and New Zealand.

2 Protected interests in contract law and assessing loss

Fuller and Perdue's article has been extremely influential and their terminology continues to be utilised by the courts² but it is not without its critics ( McLauchlan, 2007 ; Craswell, 2000 ; Kelly, 1992 ; Barnes, 1999 ). Three principal purposes which may be pursued in contract damages are distinguished.

Following a breach of contract the innocent party may have:

a restitution interest, namely the right to restoration of a valuable benefit conferred on the other party, the object being to prevent unjust enrichment;

a reliance interest, namely the right to compensation for loss due to steps taken by the innocent party in reliance upon the existence of the contract, the object being to restore the innocent party to the position which he or she would have occupied had the contract not been made; and/or

an expectation interest, namely the right to compensation for loss of the bargain, the object being to financially restore the innocent party to the position which he or she would have occupied had the contract been performed³.

In C&P Haulage v. Middleton⁴ the article was cited in relation to the reliance interest, which is applicable in limited situations. It is best viewed as protecting the expectation interest ( Burrows, 2004 ). Rowan (2010) discussing the contractual performance interest calls it “a label now used in place of the more traditional ‘expectation interest’”. However, a search through the cases in the three jurisdictions does not confirm that the judiciary has replaced the label “expectation” with “performance”. Certainly, there has been much academic comment as to the lack of protection of the performance interest. The cases demonstrate that where appropriate the courts have paid due regard to the performance interest. It cannot be said that the performance interest has replaced the expectation interest.

The two main methods of assessing the plaintiff's loss can be described as a cost of cure award and a difference or diminution of value award. They are particularly relevant for building contracts, but they will apply to any type of contract. In the case of cost of cure, the plaintiff is awarded the cost of curing the breach. Diminution of value is the difference in value between what was contracted and what was supplied. If there is no possible replacement, this may be the only available measure. The recent Australian High Court case, Tabcorp Holdings Ltd v. Bowen Investments Pty Ltd⁵ highlights the importance of performance of contracts, which is a feature of the expectation interest. In that case, a tenant with “contumelious disregard for the landlord's rights”⁶ breached a leasehold covenant and destroyed the foyer and replaced it. The damages in the lower Court were AUS$34,820, being the difference in value of the property with the old foyer and its value with the new foyer. On appeal, the damages were assessed on the cost of cure basis by the full federal court. This resulted in an increase to AUS$1.38m being the estimated cost of reinstatement of the foyer to its former condition ($580,000) and loss of rental income during the four-month period in which such works would be carried out ($800,000). The High Court of Australia dismissed the appeal and held that the appropriate measure was cost of cure. The Court reiterated the “ruling principle” with respect to damages as stated by Parke B in Robinson v. Harman⁷. The Court expressed agreement with Oliver J's statement in Radford v. De Froberville⁸ that the words “the same situation, with respect to damages, as if the contract had been performed” do not mean “as good a financial position as if the contract had been performed”⁹. Ruxley Electronics and Construction Ltd v. Forsyth¹⁰ was distinguished on its exceptional facts. The High Court of Australia referred to the facts:

The House saw the following matters as indicating that the cost of reconstruction was not recoverable: The trial judge made the following findings which are relevant to this appeal: (1) the pool as constructed was perfectly safe to dive into; (2) there was no evidence that the shortfall in depth had decreased the value of the pool; (3) the only practicable method of achieving a pool of the required depth would be to demolish the existing pool and reconstruct a new one at a cost of £21,560; (4) he was not satisfied that the respondent intended to build a new pool at such a cost; (5) in addition such cost would be wholly disproportionate to the disadvantage of having a pool of a depth of only 6ft as opposed to 7ft 6in and it would therefore be unreasonable to carry out the works; and (6) that the respondent was entitled to damages for loss of amenity in the sum of £2,500¹¹.

In Ruxley Electronics, the plaintiff was awarded £2,500 amenity damages. The case has been criticised as it fails to protect the performance interest. However, the above facts support the view that in the particular circumstances it was not reasonable for the plaintiff to require complete replacement or reinstatement.

Rowan¹² argues that the force and logic of freedom of contract should extend the available agreed remedies. The reason to advocate cost of cure damages clauses, restitution, penalty and specific relief clauses is to provide adequate protection to the performance interest. However, reasonableness is a vital ingredient of contract relief and it would be unlikely that the courts would agree that there was such a need. This is evident from the New Zealand Court of Appeal discussion in relation to exemplary damages in contract law:

There is certainly no need for exemplary damages to fill any hole in the range of compensatory damages in the contract field. Contractual remedies now available in appropriate cases include expectation damages, reliance damages, and damages for non-pecuniary loss, mental distress, disappointment and loss of amenity. It has even been suggested that a Court could order an account of profits as a contractual remedy (Attorney-General v Blake [2001] 1 AC 268). In addition, in appropriate cases, indemnity costs may be available for improper conduct in the course of litigation. And, of course, also within the Court's armoury are the non-monetary remedies of injunction and specific performance. There is no reason in principle to add yet another remedy to the above list that would give a contracting party a windfall profit over and above that which it had bargained for¹³.

The New Zealand Court of Appeal referred to overseas authority and stated that it was “particularly influenced by the detailed reports undertaken by the law commissions in the England and Wales and Ireland”¹⁴.

In the House of Lords in Attorney-General v. Blake¹⁵ it was held that the Crown was not entitled to restitutionary damages but to an account of profits. It was clear that these are both exceptional remedies. In the case of a restitution or account of profits clause, it would be impossible to assess the profit likely to be made and if all the profits were stipulated then that would be a penalty. It seems likely that the courts would regard a restitution clause as penal as “agreed remedies will to some extent be assessed in line with the judicial remedies available”¹⁶.

3 Agreed damages

In this section, it is proposed to consider the approach of the three jurisdictions to the agreed remedies of liquidated damages and exclusion clauses. The interpretation of a contract will be particularly important when the contract excludes or limits liability. The courts have developed rules which at times may not reflect a possible objective interpretation but produce a fair result.

3. 1 Liquidated damages

At the time of contracting, the parties may make provision in their contract as to what damages shall be recoverable in the event of breach. If there is a dispute and the damages are classified “liquidated damages” then the clause will be enforced, but it will not be enforced if it is held to be a “penalty clause”.

The applicable principles are those summarised by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd:

It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have...