Remedies › Module guides › Contract damages

Contract damages · Remedies module 2

The idea

Contract damages ask one question with two comparators. What position would the plaintiff hold if the contract had been performed, and what position does she hold now. The gap between those two positions is the award. Most of the marks in this module sit in choosing the right pair of figures to compare and defending the choice. The measure comes first and the limiting doctrines come second. This is because a limit can only trim a figure you have already fixed. Examiners plant the comparators in the facts as dollar amounts. The strong answer names both figures, computes the gap and states the minimum the plaintiff recovers even if the contested points go against her.

Some rules carry a small icon marking the structure the rule takes. The icon is a reading aid and nothing more. The facts of the cases and the words of the rules do the work.

Attack plan

1. First ask what kind of claim this is. If the money claimed is a fixed sum that has already fallen due, such as an unpaid price or instalment, it is recovered as a debt. No loss needs to be proved and the rules about mitigation and remoteness never apply.
2. Choose the measure of damages. The starting point is the position the contract promised the plaintiff. For defective building work the usual measure is the cost of fixing the work, and the smaller award for lost enjoyment applies only where fixing it would be unreasonable. Damages for wasted expenditure are available only where the expected profits cannot be proved. Damages for distress need one of the recognised gateways, such as a contract whose object was pleasure.
3. Apply the limiting doctrines, one loss at a time. Causation first, then remoteness, then mitigation. Each head of loss gets its own analysis rather than one global answer.
4. Check any agreed damages clause against the penalty rule. A sum payable on breach is unenforceable if it is out of all proportion to the interests the clause protects, and the party attacking the clause must show that.
5. Conclude with a dollar figure. State the award, the fact that drove it, the minimum the plaintiff recovers even on the losing view, and why the alternative award was rejected.

Cases at a glance

Case	In a line
Clark	A buyer received non compliant sperm straws and had recouped the cost from her patients. The value of the promised performance at delivery is itself the loss, and later dealings do not reduce it
Bellgrove	Defective foundations justified demolition and rebuild. Rectification damages need the cure to be both necessary and reasonable
Tabcorp	A foyer was destroyed in breach. Rectification of $1.38 million was awarded over a $34,000 difference in value, and unreasonableness is exceptional
Ruxley	A pool was built nine inches too shallow. The cure was refused and a modest amenity award took its place
McRae	No tanker existed at the promised location. Wasted expedition costs were recovered and the onus fell on the defendant
Amann	Surveillance profits were speculative. The reliance measure opened, and the defendant may still prove the venture was doomed
Cessnock	A hangar was built for a lease that never came. The onus operates as a facilitation principle resolving uncertainty against the contract breaker
Baltic Shipping	A pleasure cruise ended in shipwreck. Distress damages need a pleasure object, physical inconvenience or psychiatric injury within the ordinary rules
Moore	A ruined river cruise. Edelman J confirmed the distress rule
Elisha	The High Court restated the orthodox remoteness limbs. Assumption of responsibility informs the limbs rather than replacing them
Alexander (McHugh JA)	A market collapse followed an audit breach. The collapse and not the breach was the operative cause of that head of loss
March	A breach need only be a cause judged by common sense. The but for test guides rather than governs
Hadley	Lost milling profits were never communicated to the carrier. The two limbs of remoteness begin here
Victoria Laundry	Ordinary laundry profits were recoverable. The exceptional undisclosed dyeing contracts were not
Achilleas	Lord Hoffmann confined liability to the risks a defendant assumed. A persuasive foil only, after Elisha
Burns	Continued haulage with a defective engine limited recovery. The onus sits on the defendant and impecuniosity is assessed on the facts
Paciocco	Bank late fees were upheld. Provisioning and capital costs were legitimate interests, and the onus falls on the party resisting the clause
Andrews	The penalty doctrine reaches stipulations conditioned on events other than breach where a collateral stipulation secures a primary one

The rules

R12 · What is the measure of damages for breach of contract? Damages for breach of contract place the plaintiff so far as money can do it in the position as if the contract had been performed. Clark. Trap. Clark cuts both ways. Argue the orthodox value at breach answer, then meet the overcompensation objection with the vindication reading.

R13 · What is the measure for defective building works? For defective works the measure is the cost of conforming the works to the contract where rectification is necessary to produce conformity and a reasonable course to adopt. Bellgrove; Tabcorp. Reasonableness is the element students skip. Address it before comparing any figures.

R14 · When will rectification damages be refused as unreasonable? Rectification is refused as unreasonable where the breach is technical and the cost wholly disproportionate to any benefit, in which case modest damages for loss of amenity may follow. Ruxley. Tabcorp reads the exception narrowly, so the defendant carries the argument.

R15 · When may a plaintiff recover reliance damages instead? Where expected profits cannot be established the plaintiff recovers expenditure reasonably incurred in reliance on the promise, and the onus falls on the defendant to prove the expenditure would not have been recouped. McRae; Amann; Cessnock. Trap. The reliance measure requires profits that cannot be proved rather than profits that are merely small.

R16 · When are distress damages recoverable in contract? Distress damages for breach of contract require that the distress flow from physical inconvenience, or that an object of the contract was pleasure, relaxation or freedom from molestation. Baltic Shipping; Moore. Any one gateway suffices, and psychiatric injury runs separately within the ordinary remoteness rules.

R17 · How is causation established where another event contributed? A breach need only be a cause of the loss judged by common sense, and the but for test guides rather than governs. Alexander (McHugh JA); March. A later event severs the chain only where it is independent and overwhelming. Run the heads separately.

R18 · When is a loss too remote? Loss is recoverable if at contracting it arose in the usual course of things, or from special circumstances actually communicated so as to be within reasonable contemplation. Hadley; Victoria Laundry. Either limb suffices. The examiner's signal for the second limb is a disclosure at the moment of signing.

R19 · What role does assumption of responsibility play after Elisha? Where the commercial context suggests the parties allocated the risk, liability extends only to losses for which the defendant reasonably assumed responsibility, but the High Court treats this as informing the orthodox limbs rather than replacing them. Achilleas (Lord Hoffmann); Elisha. Trap. Achilleas is not Australian law. Run it as the defendant's foil and let Elisha answer it.

R20 · How does mitigation limit damages? A plaintiff cannot recover loss that reasonable steps would have avoided, and may recover the costs of reasonable mitigation, while impecuniosity preventing mitigation is assessed on the facts. Burns; Clark. The onus sits on the defendant. Mitigation does not reduce a crystallised value at breach award.

R21 · How does an action in debt differ from damages? An action in debt enforces an accrued obligation to pay a fixed sum, so no loss need be proved and neither mitigation nor remoteness applies. General principle, no case cited in the schematic. Trap. Overlooking the debt is the classic mistake. Decide what kind of claim it is before measuring anything.

R22 · When is an agreed damages clause a penalty? A stipulation triggered on breach is a penalty if it is out of all proportion to the legitimate interests protected by performance, with the onus on the party resisting it. The doctrine can reach stipulations conditioned on other events where a collateral stipulation secures a primary one. Paciocco; Andrews. Trap. The unsettled state of the doctrine is itself examinable. Always ask first whether the clause is triggered by breach.

The flowchart

The contract damages flowchart runs the attack plan as a single page of decisions, from the debt gate through the measures to the limits. It ships with the Remedies flowcharts page at /remedies/flowcharts. Until that page is live the chart sits in Remedies Flowcharts (the companion document to the schematic).

A worked example, dissected

Mira contracted for a workshop with spotted gum lining, chosen in the contract itself to hold humidity for her rare violins, and a 3.6 metre ceiling with no reason given. The builder laid stained pine and built the ceiling low. Relining costs $210,000 against an $8,000 difference in value. Raising the roof costs $160,000 against no measurable difference at all.

The full problem, with its Pass answer, H1 answer and examiner's comments, is Problem 1 of the contract damages drill bank on the practice page.

Practise this module

Fifteen drills in the contract damages bank cover every rule above, and the exam tier runs the module inside integrated scenarios. Start with the quick drills on choosing the right figures, then attempt the bank blind.

Practise this module →