Introduction
When a contract is breached in England and Wales, the primary legal remedy available to the innocent party is an award of damages. The purpose of damages is not to punish the party in breach but to compensate the claimant for the loss they have suffered. This gives rise to a distinction between nominal damages, which are a small sum awarded to acknowledge a technical breach where no real loss has occurred, and substantial damages, which are intended to provide meaningful compensation for a quantifiable loss.
The foundational principle for the award of substantial damages in contract law was established in the landmark case of Robinson v Harman (1848). In his judgment, Baron Parke stated that the rule of the common law is to place the innocent party, so far as money can do it, in the same situation as if the contract had been performed. This essay will explain this compensatory principle, focusing on how substantial damages are calculated to meet this objective. It will discuss the primary measure of expectation loss, considering both the 'difference in value' and 'cost of cure' approaches, as illustrated by the important case of Ruxley Electronics and Construction Ltd v Forsyth. Finally, the essay will consider how the courts approach the calculation of damages in situations where the loss is difficult to quantify, such as in cases involving a 'loss of a chance' or non-pecuniary losses like mental distress.
The Compensatory Principle and Expectation Loss
The principle of compensation, as articulated in Robinson v Harman (1848), is the starting point for any discussion of substantial damages. The goal is to fulfil the claimant's contractual expectations. This is known as the 'expectation interest' or 'expectation loss'. This measure aims to give the claimant the value of the benefit they would have gained had the contract been executed correctly. For example, if a seller agrees to deliver goods for £1,000 but fails to do so, and the buyer has to purchase equivalent goods on the open market for £1,200, the buyer's expectation loss is £200. An award of £200 in damages would put the buyer in the position they would have been in if the contract had been performed, as they would have their goods for a total outlay of £1,000.
While expectation loss is the dominant measure, the courts sometimes use an alternative known as 'reliance loss'. This measure aims to compensate the claimant for expenses they incurred in reliance on the contract being performed. It is typically used when it is too difficult or speculative to calculate what the expectation loss would have been. In Anglia Television v Reed (1972), a television company hired an actor for a film, but the actor repudiated the contract at the last minute. The company had to abandon the film project. It was impossible to know whether the film would have made a profit, so calculating the expectation loss was not feasible. Instead, the court allowed the company to claim for its wasted expenditure, including costs incurred even before the contract with the actor was signed. This demonstrates a degree of flexibility, but the primary goal remains to compensate for loss based on the claimant's expectation.
Calculating Expectation Loss: Cost of Cure vs. Difference in Value
When performance is defective rather than absent, calculating the expectation loss can become more complex. The two primary methods used are the 'difference in value' and the 'cost of cure'. The difference in value approach awards the claimant the difference between the value of the performance promised and the value of the performance actually delivered. The cost of cure approach awards the claimant the cost of remedying the defective work to make it conform to the contract.
Generally, the cost of cure is the preferred measure as it most directly gives the claimant what they contracted for. However, this is not an absolute rule, and its application is subject to a test of reasonableness. The leading authority on this issue is the House of Lords decision in Ruxley Electronics and Construction Ltd v Forsyth (1996). In this case, Mr Forsyth contracted for a swimming pool to be built with a diving area of 7 feet 6 inches deep. The pool was constructed to a depth of only 6 feet 9 inches. The pool was still perfectly safe for diving, and the difference in depth had no impact on the property's market value. Mr Forsyth claimed £21,560, the cost of demolishing and rebuilding the pool to the correct depth (the 'cost of cure').
The House of Lords rejected this claim. They held that awarding the cost of cure would be wholly unreasonable and disproportionate to the benefit Mr Forsyth would gain. Lord Jauncey noted that damages are designed to compensate for loss, not to provide a "gratuitous benefit" to the claimant. Since the value of the property was not diminished, the 'difference in value' was nil. However, the court recognised that Mr Forsyth had not received exactly what he had bargained for and had suffered a real loss of a contractual preference. They upheld the trial judge’s award of £2,500 for 'loss of amenity' or 'consumer surplus'. This award acknowledged his disappointment and loss of enjoyment without providing a windfall. Ruxley therefore establishes a crucial limitation on substantial damages: the claimant cannot insist on a particular measure of loss, such as cost of cure, if it is unreasonable in the circumstances.
Difficulties in Quantifying Substantial Damages
While the principles of expectation loss are relatively clear, their application can be challenging when the loss suffered is not easily translated into a monetary value. The courts have developed principles to deal with such situations to ensure that a claimant is not left without a substantial remedy simply because their loss is difficult to prove with mathematical certainty.
One such area is the 'loss of a chance'. Sometimes, a breach of contract does not cause a definite financial loss but instead deprives the claimant of the chance to obtain a benefit. In Chaplin v Hicks (1911), the claimant was an actress who entered a beauty contest organised by the defendant. As one of 50 finalists, she was guaranteed an interview, from which 12 winners would be selected for acting roles. The defendant breached the contract by failing to give her reasonable notice of the interview, causing her to miss it. She could not prove that she would have been one of the 12 winners. Nevertheless, the Court of Appeal held that she had been deprived of a real and substantial chance. The court awarded her £100 in damages, acknowledging the difficulty in assessment but refusing to let that difficulty prevent a recovery.
Another problematic area is recovery for non-pecuniary losses, such as mental distress, anxiety, or loss of enjoyment. The traditional position, established in Addis v Gramophone Co Ltd (1909), is that damages for mental suffering caused by a breach of contract are not recoverable. This is based on the idea that contracts, particularly commercial ones, are concerned with economic outcomes, not emotional well-being. However, the courts have carved out a significant exception to this rule. Where the very object of the contract is to provide pleasure, relaxation, or peace of mind, damages for the loss of that benefit are recoverable. In Jarvis v Swans Tours (1973), the claimant booked a skiing holiday that was described in the brochure in glowing terms. The reality was a profound disappointment. Lord Denning MR held that the claimant was entitled to damages not just for the financial value of the holiday but also for his disappointment and distress, as he had been promised an enjoyable experience. This principle was affirmed and clarified in Farley v Skinner (2001), where the House of Lords confirmed that such damages could be awarded where a major or important, though not necessarily the sole, object of the contract was to provide such a benefit.
Conclusion
In conclusion, the award of substantial damages in contract law is governed by the fundamental aim of compensation. The guiding principle, laid down in Robinson v Harman, is to place the claimant in the position they would have been in had the contract been performed. This is primarily achieved by calculating the claimant's expectation loss, which can be measured either by the difference in value or the cost of cure. However, as the decision in Ruxley Electronics demonstrates, the courts will not mechanically apply these measures, instead insisting on a standard of reasonableness to avoid disproportionate awards that would provide the claimant with a windfall.
Furthermore, the law has shown a degree of pragmatism when faced with losses that are inherently difficult to quantify in precise financial terms. By allowing recovery for the loss of a substantial chance, as in Chaplin v Hicks, and for non-pecuniary losses in specific contexts, as in Jarvis v Swans Tours and Farley v Skinner, the courts have ensured that the inability to calculate a loss with certainty does not prevent a claimant from receiving substantial damages. The law of damages for breach of contract therefore seeks to provide a fair and just monetary substitute for the performance that was promised, balancing legal principle with practical realities.
References
Cases
- Addis v Gramophone Co Ltd [1909] AC 488
- Anglia Television v Reed [1972] 1 QB 60
- Chaplin v Hicks [1911] 2 KB 786
- Farley v Skinner [2001] UKHL 49
- Jarvis v Swans Tours [1973] QB 233
- Robinson v Harman (1848) 1 Ex 850
- Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344
Books
- McKendrick, E. (2022) Contract Law: Text, Cases, and Materials. 10th edn. Oxford University Press.
