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Contractual Damages - What you are able to claim after proving your claim in contract

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Before pursuing a claim for a breach of contract, you should be clear on what damages you may be able to pursue if your claim is successful.

What are damages?

‘Damages’ refers to the amount of compensation you are able to pursue if your claim is successful. It is possible to limit the amount of damages by using what are referred to as ‘exclusion clauses’ within the contract. These clauses work to limit the contractual liability of either party which in turn limits the amount of compensation which can be claimed.

What can I expect to recover?

The purpose of contractual damages is to place the claimant in the position they would have been in if the defendant had not breached the contract to begin with.

In this sense, there are two types of damages which can be recovered: expectation loss and reliance loss.

The purpose of expectation loss is to put the claimant in the position they would have expected to be in had the defendant performed the contract as they were meant to.

A simple example is where the defendant builds a wall around the claimant’s house. The wall falls down as soon as the defendant leaves. The claimant then has to contract a different builder to rebuild the wall. The claimant may be able to recover the amount he paid to the second builder from the defendant because the claimant expected to have a wall around his house at the conclusion of the contract.

Reliance losses, generally less common, may be available where it is not possible to accurately predict the position that the claimant would have been in if the defendant had not breached the contract. This leaves the claimant in a position where they can claim for the amount of money they spent in relation to preparing for the defendant to perform the contract – given that the money was only spent because the claimant relied upon the defendant.

An example is where a business owner (the defendant) contacts a manufacturer of children’s toys with an intricate design which he wants producing. The two parties enter into a contract stating that if the claimant builds a completely new machine which can manufacture these toys he will place an order for an undisclosed number of units with him, the value of which will cover the cost of the machine and provide a substantial profit. The claimant builds the machine at great expense but then the defendant fails to place the order. The claimant may be entitled to claim for the cost of building the machine given that it was built because he was relying on the defendant and it would be impossible to accurately predict how much the claimant would have received if the defendant had not breached the contract because the number of units was undisclosed.

Notably, a claimant cannot claim both expectation and reliance losses.

Direct losses and Indirect losses

In a claim for breach of contract only those losses which were foreseeable at the time of entering into the contract are recoverable. Those which only became foreseeable at the time of breach are unrecoverable.

Direct losses refer to any losses which arise as a direct result of the breach (for example the wall scenario above).

Indirect losses refer to losses which do not arise due to the breach but rather due to a unique set of circumstances which the parties knew or should have known about at the time they entered into the contract.

Normally, if they are foreseeable, either type of loss is recoverable, however, indirect losses are more commonly excluded through the use of exclusion clauses, as discussed above, than direct losses are.

Negotiating damages

Negotiating damages refer to those damages which the defendant may have paid to the claimant if, before the defendant breached the contract, the two parties had negotiated a payment to the claimant in return for performing the contract.

The recoverability of negotiating damages is not entirely clear, yet the Supreme Court has stated that this avenue of recovery will not normally be appropriate. However, although they are unlikely to apply, negotiating damages may be recovered “where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset”.

Mitigation of Loss

The law requires that a claimant take reasonable steps to mitigate the amount of loss they incur as a result of the defendant’s breach of contract.

For example, in the toy manufacturing scenario above, if the defendant had informed the claimant before he finished making the machine that he would not be placing an order the claimant would be expected to mitigate his loss and stop building the machine. If he did not, he may not be able to claim for the whole amount of building the machine; potentially only the amount which had been spent before the defendant had told him he would not be placing an order.

If a claimant fails to mitigate their loss any damages which are awarded may be reduced so as to reflect what the actual loss would have been if the claimant had mitigated their loss.

Interest on damages

In most cases, claimants are entitled to interest on the amount their damages, though this does not happen automatically. There are statutory provisions for claiming interest but there may also be provisions contained within the contract.

What else is recoverable?

In general, there are normally two other types of costs which claimants may seek to recover. The first, which are recoverable, are costs incurred where members of staff are not doing their normal jobs because they are dealing with the consequences of the defendant’s breach of contract.  

The second type, which are non-recoverable, are the costs incurred due to the preparation of a claim against the defendant for a breach of contract.

Things to consider

In summary, it is important for both parties to a contract to keep accurate and detailed records of all costs incurred and the reason for which they were incurred. In this sense, the dates and times at which costs were incurred are particularly important.

If you are hoping to claim for time members of staff have spent dealing with a breach of contract it is essential that you keep detailed records of the times and dates on which they worked and the manner of the work they were carrying out.

Finally, when negotiating contracts with other parties keep in mind what types of liability you would like to exclude, or which you see as being potentially foreseeable should the contract be breached, as this normally has a bearing on the amount of compensation which can be claimed.

If you require assistance with any of the issues discussed above, you can contact Aaron Marshall on 0161 684 6946 at your earliest convenience.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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