At times a party to a contract will not hold their end of the said contract. Usually when a contract is breached the injured party has a number of options to choose from to remedy their position and such include;
- Refusing further performance of the contract
- To bring an action for damages
- To sue on a quantum meruit
- To sue for specific performance
- To sue for injunction
In this article we are focusing on damages, specifically how to calculate damages in a contract
What are damages?
Damages generally mean money awarded to a party who has suffered loss or injury as a result of breach of a contract by the other party.
You should distinguish damages from a fine which is money that a court can award the injured party. The difference is in the intention in the sense that with damages the intention is to compensate the injured party, while with a fine the intent is to punish the accused if found liable. Fines are used in criminal cases while damages are used in civil cases.
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Whenever there is a breach of contract the aggrieved party is entitled to bring action for damages, assuming they are entitled to substantial damages, otherwise the party can only sue for nominal damages. Nominal damages are the kind of damages that recognizes that the party’s legal rights were infringed.
How to calculate damages in a contract
In the event of an action for damages as a result of breach of contract the following rules will help in the calculation of damages;
#1 loss of bargain, which means that the injured party is to be returned to the same financial position as if the contract has been performed
What this means in a simpler context is, if you contract for someone to do a given job or supply certain items, damages amount to the loss you incur if they fail to perform the job. If the job is done in a defective manner then the damage (loss of bargain) is the cost you incurred to correct the defect. Of course if this approach leads to an unreasonable amount the court can settle for the value difference between what you contracted for and what you got. This is referred to as diminution in value.
#2 difference in value approach which is common in sale of goods contracts
If the buyer refuses to take delivery of the goods, according to sale of goods act, the seller’s damages, unless proved otherwise, is the difference between the contract price and the market price if the market price is lower, on the day the delivery should have been accepted. The reverse is true to the buyer if the seller fails to deliver the goods on the agreed day
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#3 The plaintiff is not to be compensated for more than the his true loss
This is why when calculating how much one gets, tax liability of the person can also, at time, be taken into account.
For example;
British Transportation commission v Gourley ( 1956)
G, a civil engineer, was injured in a railway accident for which the British transport commission accepted the liability. The damages for earnings, actual and prospective, were agreed to be £ 37, 720 but, income tax and surtax, to which G was liable, were taken into account they would be reduced to £ 6,695.
HELD: It would be unrealistic to ignore the tax element; if the tax liability were not taken into account G would receive more than he had lost. Consequently B.T.C had to only pay the lower amount.
#4 The damages must be for losses that were reasonably foreseeable, when the contract was made, as liable to result from breach of contract
This is important because it helps in understanding why loss of profits for non-delivery or delayed delivery may be recovered when the party in breach could have reasonably contemplated that it was a serious possibility that such a loss could have occurred
Look at this example
Victoria Laundry v. Newman Industries (1949)
V bought a boiler from N to use in his laundry. Delivery was to be made on June 5 but was not made until November 8. V claimed (1) loss of the profit the laundry would have made had the boiler been delivered in time; (2) loss of profit from some highly profitable dyeing contracts.
HELD: (1) the laundry profit loss were recoverable, as N must have contemplated their loss if there was delay, but (2) the loss on dyeing contracts, which could not have been contemplated, could not be recovered.
#5 if the loss doesn’t naturally arise from the breach, and yet such loss may be supposed to have been in contemplation of both parties at the time they contracted as the probable result of the breach of it, the injured party may recover
Remember as part of managing contractual risks it is a wise move to communicate the nature of unusual losses or damages likely to be sustained in a contract before you make the contract, this way you contract subject to the prospective liability.
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#6 the breach of contract must be the proximate cause of the loss or damages.
Supposing the loss or damage is as a result of another event, for instance, the claimants own negligence, the chain of causation is broken
#7 Duty to mitigate the loss
It is the duty of the injured party to take reasonable steps to minimize damages. According to Lord Haldane in British Westinghouse Electric and manufacturing CO v Underground electric railway (1912) “the fundamental basis is compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of damages which is due to his neglect to take such steps”
Conclusion
The answer to the question how to calculate damages in a contract can be summed up with the answers to following six questions;
- Has the claimant suffered any loss?
- Is the loss suffered actionable?
- Did the breach of contract cause the loss?
- Was the type of loss reasonably foreseeable?
- Did the claimant mitigate the loss?
- Did the claimant contribute to the loss?
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