Calculating losses from a contract breach

A breach of contract can broadly be described as the failure to comply with any term of an agreement; some examples include a refusal to perform, incomplete performance, delay or unlawful termination.  Once it has been determined that a breach of contract has in fact occurred, the next question is how to determine the resulting loss and whether it can be recovered from the responsible party.  Whilst there is no hard and fast rule when attempting to quantify losses, there are certain principles which form part of the process of assessing damages caused by a breach of contract.

General rule regarding quantification of damage

It is generally accepted that the rule for assessment of damages for breach of contract is set out in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 116 by Deane J, which provides:

“The general principle governing the assessment of compensatory damages in both contract and tort is that the plaintiff should receive the monetary sum which, so far as money can, represents fair and adequate compensation for the loss or injury sustained by reason of the defendant’s wrongful conduct.”

Damages in contract generally attempt to place a plaintiff in the position which would have occupied had the breach not occurred (Monarch SS Co Ltd v A/B Karlshamns Oljeifabriker [1949] AC 196 at 220).  An alternative view is where there is been a breach of contract, then the plaintiff should have been placed in the position as if the contract had been performed (Robinson v Harman (1848) 1 Ex 850 at 855).

Where a plaintiff claims to have suffered loss or damage by reason of a defendant’s breach, the onus of proving the extent of the loss falls on the plaintiff.  It must be established:

• that the loss or damage was caused by the defendants breach; and
• that the loss or damage was not too remote.

The test for remoteness – Hadley v Baxendale

The well-known rule regarding remoteness of damage in the context of contract is that stated by Alderson B in Hadley v Baxendale (1854) 9 Ex. 341 [156 E.R. 145]. 16:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as 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 of it.”

General damages vs special damages

General damages cover the loss which naturally occurred as a result of the breach of contract.  A plaintiff can claim special damages, being damages of an exceptional nature, where the defendant has prior knowledge of the likelihood that the loss would be suffered (Stroms Bruks Aktie Bloga v Hutchinson [1905] AC 515 at 525).

Reliance damage

It’s not uncommon for a plaintiff to spend money in the anticipation of performance of a contract.  In McRae v Commonwealth Disposals Commission [1951] 79 the plaintiff was awarded a contract by the defendant to salvage an oil tanker.  The plaintiff sent a vessel to the tanker’s alleged location and the tanker did not exist.  The courts determined that the appropriate damages was for costs by the plaintiff in searching for the tanker.

Combined claims

Although the plaintiff may claim multiple heads of damage, the court will ultimately decide the basis for assessing damages and the plaintiff cannot elect the bases for assessment (Cf Stocznia Gdynia A v Gearbulk Holdings Ltd [2010] 1 QB 27).  The Court will never award more that which exceeds the loss actually suffered so care must be taken to ensure the plaintiff does not recover the same loss twice over.  This was discussed in Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292 whereby the plaintiff purchased machinery for the purpose of producing dry clay.  The machinery ultimately was not able to produce dry clay at the rate which was promised so the plaintiff sought to be compensated.  Initially the plaintiff had claimed a refund of the money spent purchasing the equipment and also a loss of profit for the difference between the rate that clay was promised to be produced and the rate that is actually produced.   The court rejected the profit component because the plaintiff could only have earned the profit if they had incurred the capital expenditure.

Takeaways

If you believe a contract has been breached and you are trying to quantify your losses, you should consider:

• your position if the contract had been performed, compared to your position currently;
• whether the breach caused you to lose other contracts or opportunities, and whether the other party were aware of these opportunities; and
• whether you attempted to mitigate your loss.

Links and further references

Cases

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292

Hadley v Baxendale (1854) 9 Ex. 341 [156 E.R. 145]. 16

Monarch SS Co Ltd v A/B Karlshamns Oljeifabriker [1949] AC 196 at 220

Stocznia Gdynia A v Gearbulk Holdings Ltd [2010] 1 QB 27

Stroms Bruks Aktie Bloga v Hutchinson [1905] AC 515 at 525

Further information about breach of contract

If you need advice on how to ensure that your quantification of losses for breach of contract are reasonable or if you need to defend them, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

---

Related insights about breach of contract