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Damages - any other choice?

17 May 2010

 This article considers the choices that a claimant has relating to how its damages claim should be measured in a breach of contract claim. The article considers the different ways in which a claimant may quantify his loss, namely the "reliance, "expectation" and "restitutionary" measures of damages, and the limits on a claimant's choice in this regard.

"My Lords, George Blake is a notorious, self-confessed traitor."

Attorney General v Blake (Jonathan Cape Ltd Third Party) [2001] 1 AC 268 per Lord Nicholls of Birkenhead at 275.

George Blake's reputation is defined by his treason, but that was not always the case. Born in Rotterdam in 1922 and educated in Holland and Cairo, he returned to Holland as a teenager and served in the anti-Nazi Dutch resistance. He was captured and interned but released due to his youth. Before he could be re-interned he had escaped to London disguised as a monk. There, he joined the Special Operations Executive and, following its dissolution in 1946, joined MI6. After the war, he was posted to South Korea but within months of his arrival, Seoul was captured by the North Koreans and Blake was imprisoned. He was released in 1953 and returned to Britain to a hero's welcome.

In 1955, he was sent to work in Berlin. It was there that he contacted the KGB and commenced his betrayal. Over the following years, he betrayed over 400 MI6 agents, causing untold damage to its operations in Eastern Europe. He was later to confess, "I don't know what I handed over because it was so much." In 1961, he was exposed as a spy by a Polish defector. He was arrested and tried in camera at the Old Bailey. He was sentenced to 42 years' imprisonment, which at the time was the longest sentence ever handed down other than a life term. Five years later, however, he escaped and fled to Moscow.

In 1990, he published his autobiography, "No other choice". Whilst that, in itself, was a breach of the Official Secrets Act, its impact on national security was non-existent. Blake had long since ceased to have access to sensitive information and the book related to events decades before. Its impact on the law of contractual remedies, though, was more profound. For the first time, the House of Lords allowed a claimant in a breach of contract claim to recover the whole of the defendant's gains from the breach on a restitutionary basis. What choices does this open up for a claimant?

Contractual damages and compensation

Damages are available as of right in breach of contract claims, and claimants often feel that they represent their only choice. In terms of the measure of damages, the courts often talk about compensating the claimant for the loss that it suffered from not getting that for which it bargained. They emphasise that the purpose of contractual damages is not to punish the contract breaker. At the same time, the courts have always acknowledged that it is impossible to achieve perfect compensation: "the rules as to damages can in the nature of things only be approximately just."

The issue is not, however, simply one of measurement. Even within the remedy of damages, a claimant has a number of choices open to it, which it can use to maximise its recovery. At the same time, it faces a number of restrictions that may limit its room for manoeuvre.

Options for the claimant

There are potentially three routes open to a claimant.

The expectation measure

The expectation measure is supposed to put the claimant in the position that it would have been had the contract been performed. In many cases, this will be straightforward to calculate. That will not always be the case, however. In particular, in the case of service contracts, especially in the field of construction, there may be a substantial difference between the cost of curing the defect and the diminution in the market value caused by the breach.

The discrepancy is clearly illustrated in the leading case of Ruxley Electronics v Forsyth. The claimant had commissioned a swimming pool to be built to a certain depth. The pool was, in fact, less than the specified depth but was still perfectly safe to use for swimming and diving. The claimant sought to recover the cost of digging out the pool and replacing it with one that satisfied the contractual specification at a cost of £21,560. The defendants argued that the claimant should be limited to the diminution in market value, of which there was none. The House of Lords found that the claimant’s preferred route was out of all proportion to the benefit that would be obtained and, as such, the appropriate measure was the diminution in value measure. Cost of cure could be permitted where it exceeded the diminution in value, but the onus would be on the claimant to show that it was reasonable for it to do so.

Ruxley also gave rise to a further issue with expectation loss – whether awards can be made for loss of amenity. The claimant was awarded damages by the trial judge to reflect his loss of enjoyment in having a pool that was not as deep as he had wanted. It is a long standing rule of the law of contract that the claimant cannot recover damages for his injured feelings. There is an exception to that general rule where the purpose of the contract is to afford pleasure, for example a holiday contract. Ruxley arguably falls within that exception.

The House of Lords subsequently expanded the concept somewhat further, however, in Farley v Skinner where a potential purchaser of a property specifically asked his surveyor whether the property would be affected by aircraft noise. Despite the property's close proximity to a navigation beacon around which aircraft were stacked at busy times, the survey report said that it was unlikely to suffer greatly from such noise. The House of Lords held that since an important object of the contract was to give pleasure, relaxation, peace of mind, damages for loss of amenity were appropriate regardless of whether the property was, in fact, worth less than the price paid for it.

We use the term "expectation measure" as a convenient shorthand, but in fact the expectation that is compensated will depend upon a number of factors, such as its reasonableness and the purpose of the contract. These may be important considerations in determining the final damages number.

The reliance measure

The claimant will seek the reliance measure where it wishes to recover its wasted expenditure incurred in entering into the contract that has been breached. There are two key limitations on it.

First, the court will not permit the claimant to use the reliance measure to escape the consequences of a bad bargain. Where the defendant can demonstrate that, regardless of its breach, the claimant would not have recovered its expenditure, the claimant's claim is limited to the amount it would have recovered had the contract been performed. Take a simple example. I agree to sell you my car for £5,000. You pay me the price but I have been involved in a traffic accident and the car has been damaged beyond repair, such that I cannot now perform. In any event, a car of that make, model and age is only really worth £4,000. Your claim is limited to £4,000 because, even had the contract been performed, you would only ever have had an asset worth £4,000, not £5,000.

Second, the reliance measure is an alternative to the expectation measure. The claimant must choose one or the other: it is not entitled to recover both. By and large, the reliance measure will be preferable where it is difficult to demonstrate what the claimant would have recovered using the expectation measure.

The restitutionary measure

Here, the court abandons any suggestion of compensation and, instead, allows the claimant to recover some of the defendant's gain. Put another way, it does not consider the consequences of the breach for the claimant but, rather, focuses on the consequences for the defendant.

Even before Attorney General v Blake, the courts had been prepared to make awards of damages based on the defendant's gain where the breach had involved the invasion of a property interest. Where, for example, the defendant had developed its land in breach of a restrictive covenant, the courts have been willing to award the claimant the sum it could reasonably have expected to receive from negotiating some form of partial release from the covenant; the sum was based on the expected profit to be made by the defendant.

However, such an award could equally be viewed as compensation for the lost opportunity to reach a bargain for the same sum, and, indeed, has been described as such by the Court of Appeal. The Blake decision was not only clearly based on restitution; it went some way beyond established authority by allowing the Attorney General to recover the entire payment due to Blake and in allowing recovery where there was no invasion of a property interest. The House of Lords stressed that it was an exceptional remedy and emphasised the following factors, noting that they would have more weight where they were cumulative:

  • the breach was cynical and deliberate;
  • it enabled a defendant to enter into a more profitable contract elsewhere, or that the defendant had put it out of his power to perform his contract with the claimant; and
  • the breach involved a criminal offense contract.

Few defendants in a breach of contract claim are likely to be the subject of the criticism, "the Attorney General commenced an action against Blake, with a view to ensuring he should not enjoy any further financial fruits from his treachery."10 The facts of the Blake case are undoubtedly unusual. At the same time, the factors raised by the House of Lords are more common and the potential benefits to a claimant may be considerable. Certainly, it is not a route that the claimant will want to dismiss out of hand.

Freedom of choice?

The claimant, therefore, may have a number of options open to it. But these are not without limits.

  • Remoteness: Following the decision of the House of Lords in The Achilleas11 the test of remoteness is currently in something of a state of flux, but it is clear that the claimant will not recover all of its losses; it will only recover those that are reasonably foreseeable or, potentially, for which the defendant has assumed responsibility. See Damages above where Hamblen J recently considered this in Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] EWHC 542.
  • Causation: Contract applies a "but for" test of causation. That, generally, is not controversial. However issues do arise where either the claimant is arguing that it lost some opportunity by virtue of the breach (the loss of chance cases), or where some event happens after the breach that makes the losses worse (novus actus inteveniens cases).
  • Mitigation: The claimant will only be able to recover losses that it could not have avoided through taking reasonable steps. Thus, if the defendant fails to deliver on a sale of listed securities, the onus is on the claimant to procure replacement securities with reasonable speed. It cannot simply stand by as the cost of those securities continues to rise and seek to recover the increased purchase price from the defendant at a later date. The question here will be what is or is not reasonable in the circumstances. For example, the courts have held that it is not reasonable to undertake risky litigation, without specifying what the necessary level of risk is, to the extent that can even be ascertained.

It is notable that all of these factors focus on the claimant's loss. A further potential advantage of a restitution based claim is that, in shifting the focus onto the defendant's gain, these issues may be mitigated or even avoided altogether.

No other choice?

Whilst the claimant's options will rarely be unfettered, it is fair to say that it will almost always have options, even where it is confined to a damages claim. We will look, next time, at how a claimant can open up those options further by seeking a performance-based remedy, and what the defendant can do to resist that.

Further Information

This article first appeared on PLC Dispute Resolution.

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and leglisation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.