The purpose of contractual damages is COMPENSATORY: to put the claimant in the position they would have been in had the contract been performed correctly. This is the "expectation interest" or "loss of bargain" measure. This is distinct from tort damages, which aim to put the claimant in the position they would have been in had the tort never occurred (the "status quo ante"). The claimant has a right to damages for breach of contract; they are available as of right, not at the court's discretion.
Contract damages look FORWARD (where would you be if the contract had been performed?). Tort damages look BACKWARD (where would you be if the wrong had never happened?). This distinction is critical for SQE1.
There are three recognised measures of contractual damages: (1) Expectation loss (loss of bargain) - the primary measure, putting the claimant in the position as if the contract had been performed; (2) Reliance loss (wasted expenditure) - compensating expenses incurred in reliance on the contract; and (3) Restitutionary interest - recovering benefits conferred on the defendant. The claimant must elect between expectation and reliance loss; they cannot recover both for the same loss as this would amount to double recovery.
Where the claimant cannot prove their expectation loss (e.g. because profits are too speculative), they may instead claim reliance loss: the expenses wasted in reliance on the contract. In Anglia Television Ltd v Reed [1972], the claimant film company could not prove what profits a film would have made, so instead recovered pre-contract expenditure (hiring crew, arranging locations) wasted when the defendant actor pulled out. The Court of Appeal held that pre-contract expenditure could be recovered provided it was within the reasonable contemplation of the parties. However, the defendant can defeat a reliance claim by proving the claimant would not have recouped their expenditure even if the contract had been performed (C & P Haulage v Middleton [1983]).
A claimant cannot recover BOTH expectation loss and reliance loss for the same loss, as this would result in double recovery. They must elect. However, different heads of loss may use different measures (e.g. expectation for lost profits on one element and reliance for wasted costs on another, provided no overlap).
Where there is an available market for the goods or services in question, damages are assessed as the difference between the contract price and the market price at the date of breach. For sale of goods, this is codified in s.51(3) (buyer's remedy) and s.50(3) (seller's remedy) of the Sale of Goods Act 1979. If the market price exceeds the contract price (and the buyer is the claimant), the buyer recovers the difference. If the buyer can obtain substitute goods at or below the contract price, nominal damages only.
Where defective performance is provided, damages may be assessed as either (a) the cost of cure (cost of putting the defect right) or (b) the difference in value (difference between what was promised and what was provided). In Ruxley Electronics and Construction Ltd v Forsyth [1996], a swimming pool was built 6 inches shallower than specified. The cost of rebuilding was over 21,000 pounds but the difference in value was nil (the pool was perfectly usable). The House of Lords held that cost of cure was unreasonable and disproportionate. Instead, they awarded 2,500 pounds for loss of amenity. The court will consider proportionality and the intention of the innocent party when choosing between these measures.
Where cost of cure is disproportionate to the benefit obtained, the court may award difference in value or a modest sum for loss of amenity instead. This prevents the claimant from obtaining a windfall. Always consider whether the claimant genuinely intends to carry out the cure.
The claimant must establish that the breach of contract caused their loss. The basic test is the "but for" test: but for the defendant's breach, would the claimant have suffered the loss? If the answer is no (the loss would not have occurred but for the breach), causation is established. If the loss would have occurred regardless of the breach, the chain of causation is broken and the defendant is not liable for that loss.
An intervening act may break the chain of causation between breach and loss. This is known as novus actus interveniens. The chain of causation may be broken by: (1) an act of the claimant themselves, if unreasonable; (2) an act of a third party that is unforeseeable; or (3) a natural event that is unforeseeable. However, if the intervening act was foreseeable or was a natural consequence of the breach, it will not break the chain. The defendant takes their victim as they find them.
The foundational case on remoteness in contract is Hadley v Baxendale [1854]. The court held that damages are recoverable only if the loss falls within one of two limbs: FIRST LIMB - loss "arising naturally, i.e., according to the usual course of things, from such breach of contract itself"; SECOND LIMB - loss "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." The second limb requires that the special circumstances were communicated to the defendant at or before the time of contracting.
| Feature | First Limb | Second Limb |
|---|---|---|
| Type of loss | Ordinary losses | Special/unusual losses |
| Test | Arising naturally from the breach | In contemplation of both parties |
| Knowledge required | Imputed knowledge (what a reasonable person would know) | Actual knowledge of special circumstances |
| When knowledge assessed | At time of contracting | At time of contracting |
| Example | Loss of market value of undelivered goods | Loss of an unusually profitable sub-sale known to the seller |
Victoria Laundry purchased a boiler for their laundry business but it was delivered late. They claimed lost profits from ordinary laundry business AND lost profits from an exceptionally lucrative government dyeing contract. The Court of Appeal held: ordinary business profits were recoverable (first limb - the defendant knew the boiler was needed for business). However, the exceptional profits from the government contract were too remote (second limb - the defendant had no knowledge of this special contract). This case refined the Hadley test by asking whether the loss was "reasonably foreseeable as liable to result" from the breach.
In The Heron II (Koufos v C Czarnikow Ltd) [1969], the House of Lords clarified the remoteness test in contract. A ship carrying sugar arrived late, and in the interim the market price had fallen. The Lords held the loss was recoverable because it was within the reasonable contemplation of the parties. Importantly, the Lords distinguished the contract remoteness test from tort: in contract, the loss must be "not unlikely" to result (a higher threshold than tort's "reasonably foreseeable"). Lord Reid stated the loss must be such that a reasonable person would have had it "in mind" as a "not unlikely" consequence.
In Transfield Shipping v Mercator Shipping (The Achilleas) [2009], a time-chartered ship was returned late, causing the owner to miss the market rate on the next charter. The House of Lords held the charterer was not liable for the loss of the follow-on charter at the higher rate, only for the difference in rates during the overrun period. Lord Hoffmann introduced the concept of "assumption of responsibility": was this a type of loss for which the defendant could reasonably be regarded as having assumed responsibility? This adds a further gloss to the Hadley test, though its precise scope remains debated.
The Achilleas (assumption of responsibility) test is controversial and has not replaced Hadley v Baxendale. For SQE1, apply Hadley v Baxendale as the primary test. Mention The Achilleas as a potential additional consideration, particularly in commercial shipping or commodity cases. The conventional approach remains the starting point.
In Chaplin v Hicks [1911], the claimant was a contestant in a beauty competition who was denied the opportunity to attend the final selection due to the defendant's breach. The Court of Appeal held that damages could be awarded for loss of the chance of winning, even though the outcome was uncertain. The court assessed the chance as having a real and substantial value (she was one of 50 finalists for 12 prizes). The loss of chance must be real and substantial, not merely speculative. The court will discount the damages to reflect the probability of the chance materialising.
The general rule is that damages for mental distress, disappointment, and injured feelings are NOT recoverable in contract. This was established in Addis v Gramophone Co [1909], where the House of Lords held that an employee dismissed in a humiliating manner could not recover damages for injured feelings beyond his contractual entitlement. The rationale is that contract law protects economic interests, not emotional wellbeing.
There are recognised exceptions where mental distress damages ARE recoverable: (1) Where the very object of the contract was to provide pleasure, enjoyment, or peace of mind. In Jarvis v Swans Tours [1973], a solicitor booked a holiday described as a "house party" that was nothing of the sort. The Court of Appeal awarded damages for disappointment and loss of enjoyment. (2) In Farley v Skinner [2001], a surveyor was specifically asked to investigate aircraft noise. He negligently reported no issue. The House of Lords held that even where the contract was not entirely for pleasure, damages for distress were available where a major or important object of the contract was to give pleasure or prevent distress.
| Case | Facts | Outcome |
|---|---|---|
| Addis v Gramophone Co [1909] | Humiliating dismissal from employment | No recovery for injured feelings - general rule established |
| Jarvis v Swans Tours [1973] | Holiday failed to match description | Recovery allowed - object of contract was pleasure/enjoyment |
| Farley v Skinner [2001] | Surveyor failed to report aircraft noise | Recovery allowed - important object was peace of mind |
The claimant is under a duty to take reasonable steps to mitigate (minimise) their loss following a breach of contract. They cannot recover losses which they could have avoided by taking reasonable steps. This is not truly a "duty" - the claimant is not liable for failing to mitigate - but they simply cannot recover avoidable losses. The standard is one of REASONABLENESS: the claimant is not required to take extraordinary steps, incur unreasonable expense, or risk their own commercial interests.
In British Westinghouse Electric v Underground Electric Railways of London [1912], defective turbines were supplied but the buyer replaced them with superior turbines that generated enough savings to offset the original loss. The House of Lords held that the benefits of mitigation must be brought into account. Where the claimant's mitigating steps produce a benefit, this is set off against the loss. However, any expenditure reasonably incurred in mitigation is recoverable even if the mitigation was ultimately unsuccessful.
A liquidated damages clause is a contractual provision that fixes in advance the amount of damages payable on breach. If the clause is a genuine pre-estimate of loss, it is enforceable as a "liquidated damages" clause. The claimant recovers the stipulated amount regardless of their actual loss (even if actual loss is greater or less). This provides certainty for both parties and avoids costly litigation over quantum.
In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915], Lord Dunedin set out guidelines for distinguishing a liquidated damages clause from a penalty: (1) The use of the words "penalty" or "liquidated damages" is not conclusive; (2) A clause is a penalty if the sum stipulated is extravagant and unconscionable compared with the greatest loss that could flow from the breach; (3) A clause is a penalty if the breach consists only of not paying money, and the sum stipulated is greater than the sum that ought to have been paid; (4) There is a presumption (rebuttable) that a clause is a penalty if a single lump sum is payable on multiple events of varying severity.
The Supreme Court in Cavendish Square Holding BV v Makdessi [2015] (heard together with ParkingEye Ltd v Beavis) reformulated the penalty test. The old "genuine pre-estimate of loss" test was replaced. The new test asks: does the clause impose a detriment on the contract-breaker which is OUT OF ALL PROPORTION to any LEGITIMATE INTEREST of the innocent party in the enforcement of the primary obligation? The key concepts are: (1) The innocent party must have a "legitimate interest" in performance that goes beyond simply recovering compensation; (2) The clause must not be "extravagant, exorbitant or unconscionable" having regard to that interest.
| Feature | Liquidated Damages | Penalty |
|---|---|---|
| Enforceability | Enforceable | Unenforceable (the clause is struck out) |
| Traditional test | Genuine pre-estimate of loss | Extravagant/unconscionable sum |
| Modern test (Makdessi) | Proportionate to legitimate interest | Out of all proportion to legitimate interest |
| Effect on claimant | Recovers stipulated sum | Must prove actual loss instead |
| Commercial context | Court reluctant to strike down negotiated clauses | More scrutiny of consumer contracts |
In ParkingEye v Beavis, an 85 pound parking charge for overstaying in a car park was held NOT to be a penalty. ParkingEye had a legitimate interest in managing the car park efficiently (not just deterring breach), and the charge was not out of all proportion to that interest. This case shows the modern test is more permissive of agreed damages clauses than the old test.
If a clause is found to be a penalty, it is UNENFORCEABLE. The clause is struck out and the claimant must prove their actual loss in the ordinary way. The penalty rule does NOT prevent the claimant from recovering damages - it just means they cannot rely on the stipulated sum and must instead prove their loss.
Specific performance is an equitable remedy that orders the defendant to perform their contractual obligations. It is DISCRETIONARY - the court is not bound to grant it even if the claimant is entitled to it. Being an equitable remedy, it is subject to equitable principles and maxims. It is only available where damages would be an INADEQUATE remedy. The claimant must come to court with "clean hands" (they must not have acted unconscionably themselves).
In Co-operative Insurance Society v Argyll Stores (Holdings) Ltd [1998], a tenant covenanted to keep a supermarket open in a shopping centre but decided to close it. The landlord sought specific performance. The House of Lords refused, holding that specific performance should not be granted to compel the carrying on of a business because: (1) it would require constant supervision by the court; (2) the defendant would be forced to carry on a loss-making business; and (3) the potential for unresolvable disputes about whether the order was being complied with. Lord Hoffmann emphasised that the settled practice of not ordering specific performance where constant supervision is needed should not be departed from.
Remember the equitable maxims: "He who comes to equity must come with clean hands"; "Delay defeats equity" (laches); "Equity will not assist a volunteer" (consideration required); "Equity acts in personam" (the court orders the person, not the property). These can all bar a claim for specific performance.
An injunction is an equitable court order. In contract, the main types are: (1) PROHIBITORY injunction - restraining the defendant from breaching the contract (e.g. enforcing a restrictive covenant or non-compete clause); (2) MANDATORY injunction - compelling the defendant to take positive action (closer to specific performance, and harder to obtain); (3) INTERIM (interlocutory) injunction - a temporary order granted before trial to preserve the status quo. Like specific performance, injunctions are discretionary and subject to equitable principles.
The test for interim injunctions was established in American Cyanamid Co v Ethicon Ltd [1975]. The court considers: (1) Is there a serious question to be tried? (not a frivolous claim); (2) Would damages be an adequate remedy for either party? (3) Where does the balance of convenience lie? (4) If all other factors are evenly balanced, maintain the status quo. The claimant usually must give a cross-undertaking in damages (a promise to compensate the defendant if the injunction turns out to have been wrongly granted).
In employment cases, a prohibitory injunction may be granted to enforce a valid restrictive covenant (e.g. non-compete, non-solicitation). However, the court will not grant an injunction that would indirectly compel the employee to work for the employer (as this would be equivalent to specific performance of a personal service contract). The restraint must be reasonable in scope, duration, and geographical area to be enforceable. An injunction will only be granted to enforce covenants that are valid and not in unreasonable restraint of trade.
An indemnity is a contractual promise by one party to compensate the other for specified losses, liabilities, or costs. Unlike damages (which are assessed by the court), an indemnity is a primary contractual obligation. Key features: (1) The scope of the indemnity is determined by its DRAFTING, not the common law rules on remoteness; (2) An indemnity can potentially cover losses that would be too remote under Hadley v Baxendale; (3) The limitation period may run from the date of the loss rather than from the date of breach; (4) Careful drafting is essential to define exactly what losses are covered.
| Feature | Indemnity | Damages |
|---|---|---|
| Source | Contractual promise | Common law remedy for breach |
| Scope | Determined by drafting of the clause | Subject to remoteness rules (Hadley v Baxendale) |
| Remoteness | May not be subject to remoteness limits | Subject to remoteness limits |
| Mitigation | Duty to mitigate likely still applies | Duty to mitigate applies |
| Limitation period | May run from date loss suffered | Runs from date of breach |
A guarantee is a SECONDARY obligation: the guarantor promises to answer for the debt or default of another (the principal debtor) if that person fails to perform. An indemnity is a PRIMARY obligation: the indemnifier assumes independent liability. The key distinction matters because: (1) A guarantee requires writing under s.4 Statute of Frauds 1677; an indemnity does not; (2) A guarantee is discharged if the underlying obligation is discharged; an indemnity survives; (3) A guarantee is dependent on the validity of the primary obligation; an indemnity is independent.
Section 4 of the Statute of Frauds 1677 requires that a guarantee must be evidenced IN WRITING and SIGNED by the guarantor (or their agent). The written evidence must contain the material terms of the guarantee. If there is no writing, the guarantee is UNENFORCEABLE (not void - the underlying obligation still exists but cannot be enforced against the guarantor). This formality requirement does NOT apply to indemnities, which is why the distinction between the two is so important in practice.
| Feature | Guarantee | Indemnity |
|---|---|---|
| Nature of liability | Secondary (depends on principal debtor defaulting) | Primary (independent obligation) |
| Writing requirement | Yes - s.4 Statute of Frauds 1677 | No formal requirement |
| Effect of principal obligation being void | Guarantee falls away | Indemnity survives |
| Effect of variation of principal contract | May discharge guarantor if material | Generally unaffected |
| Co-extensiveness | Liability co-extensive with principal debtor | Liability independent of principal debtor |
The label used by the parties is NOT conclusive. The court looks at the SUBSTANCE of the obligation, not the label. A document called a "guarantee" may actually be an indemnity (and vice versa) depending on whether the liability is truly secondary (guarantee) or primary (indemnity). If the obligation is to pay "if X does not pay" it is likely a guarantee. If it is to pay "regardless of whether X pays" it is likely an indemnity.
When answering an SQE1 question on remedies: (1) Identify the breach; (2) Consider what losses flow from the breach (causation); (3) Apply remoteness (Hadley v Baxendale two limbs); (4) Assess quantum (market rule, cost of cure vs difference in value); (5) Consider duty to mitigate; (6) Check for any liquidated damages clause; (7) Consider whether equitable remedies (specific performance/injunction) are appropriate and available; (8) Check for any indemnity or guarantee provisions.