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Measures of Unliquidated Damages


Unliquidated damages are damages assessed by the court, to be paid to the victim of a breach of contract in respect of his, or, exceptionally, others’ losses caused by that breach. The general aim of unliquidated damages is to provide the victim of a breach with compensation for pecuniary loss. However, the courts may depart from this generally accepted principle in exceptional circumstances and award damages on a non-compensatory basis.

There are three different measures of unliquidated damages.

Expectation Measure

This measure of damages seeks to place the victim of a breach in the position he would have been in, had the contract been properly performed. The expectation measure is often regarded as the hallmark of a contractual claim and is frequently referred to as the “contract measure of damages” or “damages for loss of bargain”.

Expectation loss encompasses the claimant’s loss of chance of making a profit. However, the loss of chance must be a real or substantial chance, as opposed to something more speculative.

In order to quantify the expectation loss, the courts have to consider the likelihood of the claimant receiving the expected benefit and its value. In determining the likelihood of the expected benefit, the courts will weigh up two factors. First, they will assess the number of eventualities upon which the chance depends. Secondly, they will decide the likelihood of each eventuality being satisfied in the claimant’s favour, in order to bring such a chance to fruition. The greater the likelihood, the higher the value of the chance.

Where the opportunity of making a profit depends upon the actions of the party in breach, the courts will usually be reluctant to award substantial damages, as the party in breach will be assumed to act in its own best interests.

There is some ambiguity surrounding how the value of a claimant’s expectation loss should be assessed. Two alternative methods are often employed. Damages may be quantified by reference to either:

  • the cost of remedying the breach of contract, either by modifying the performance tendered, or by obtaining a complete replacement performance (the latter being more costly). This is known as the ‘cost of cure’; or
  • the diminution in value of the subject matter of the contract as a result of the breach.

In some cases, these methods of assessment may produce very different results. The courts have provided some guidance as to when the different methods of assessment should be applied. Where the ‘cost of cure’ is being claimed, the courts should have regard to the reasonableness of the claimant’s actions in making such a claim. However, where the ‘cost of cure’ disproportionately exceeds the ‘diminution in value’, damages will generally be awarded on a ‘diminution in value’ basis. This is because a claim for ‘cost of cure’ would be unreasonable.

Where the ‘diminution in value’ is negligible (and the ‘cost of cure’ is disproportionately excessive), the courts are still prepared to make an award of damages, but under the guise of loss of amenity instead. By way of illustration, in Ruxley Electronics and Construction Limited v Forsyth, it was considered that the value placed by the plaintiff upon a 7 foot 6 inch deep pool (the contract size) over a 7 foot pool (the actual constructed size) was adequately recognised by an award of £2,500 for loss of amenity. This was because there was no diminution in the value of the pool as a result of the shortfall in depth and the cost of cure would have been disproportionately high.

Reliance Measure

This measure seeks to compensate the claimant for monies expended, which have been wasted as a result of the defendant's breach of contract. In other words, it restores the claimant to the position he was in prior to his reliance upon a promise of performance by the defendant. This measure is analogous to the tortious measure of damages. A claimant may wish to claim reliance loss when the expectation measure is unavailable because the claimant cannot show he has suffered any expectation loss,9 or such loss is too speculative to assess.

There are two types of reliance loss:

  • Post-contract reliance loss: This refers to any expenditure by the claimant, after entering into a contract with the defendant, which is subsequently wasted as a result of the defendant’s breach. Generally, the recoverability of such expenditure does not raise any contentious issues.
  • Pre-contract reliance loss: It has been held that pre-contract expenses are not recoverable. The rationale behind this is that a party incurs such expenses for its own benefit, at a time when it is uncertain as to whether there will be a contract or not. However, there is contradictory case law that such expenses may be recoverable, provided that they are reasonably in the contemplation of the parties as likely to be wasted if the contract were to be breached. Nevertheless, it is suggested that this conflicts with the principle that the reliance measure seeks to restore a claimant to the position he was in just prior to entering into the contract. In other words, this dicta suggests that a claimant may be restored to the position he was in many months before entering into the contract and therefore undermines the role of a contract as a device for allocating risk.

Restitutionary Measure

The restitution measure of damages seeks to restore to the victim of a breach of contract, any benefit that he has conferred on the perpetrator of that breach.

There are two types of restitutionary claims. The first is based upon enrichment by subtraction. This is where the victim of a breach of contract has conferred a benefit on the contract breaker but has received nothing in return. In other words, there has been a total failure of consideration. The second is based upon enrichment by wrongdoing. This is where the party in breach has profited from the breach of contract and the claimant seeks an account of profits. Both types of claim share a common purpose: the reversal of an unjust enrichment.

Enrichment by subtraction and enrichment by wrongdoing are founded on the law of restitution, but have, in a handful of cases been applied by the courts in a contractual setting notwithstanding that they appear to be at odds with the compensatory aim of contractual damages. Consequently, the courts have been careful to highlight the exceptional nature of the restitution measure.

In AG v Blake (now the leading authority on the restitution measure) the House of Lords reaffirmed their general commitment to the assessment of damages for breach of contract on a compensatory basis. However, Lord Nicholls said there was no reason why, in principle, an account of profits may not be used as a remedy for breach of contract. Nevertheless, he clearly emphasised its exceptional nature but resisted outlining the types of situations in which such a remedy would be available.

Some assistance in interpreting Lord Nicholls’ comments can perhaps be gained from the facts in Blake. In essence, an account of profits was allowed because of the exceptional nature of the contractual relationship involved, it being broadly analogous to a fiduciary’s duty to account for any profits made from their position or office. Blake was a former British Secret Intelligence Service agent who owed a lifelong contractual obligation of secrecy to the Crown. In breach of this obligation, he sought to profit from the publication of his autobiography.

Nevertheless, there was a powerful dissenting judgment by Lord Hobhouse, who referred to the “disruptive” consequences that could follow from attempts “to extend the decision of the present exceptional case to commercial situations so as to introduce restitutionary rights beyond those presently recognised by the law of restitution”.

There have been a number of cases following Blake, with the exception of one, where claims for an account of profits under ordinary commercial contracts have been dismissed. The exception to this general trend was Esso Petroleum Co. Ltd v Niad Ltd. However, for the purposes of brevity, it is sufficient to just say that a number of academics believe the judgment in this case to be flawed.

Herbert Smith
ADR Newsletter
August 2005

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