20Financial remedies for breach of contract
The primary remedy for any breach of contract is an award of damages. This remedy is always available, unlike the remedy of termination (see Chapter 22) which is only available in cases of serious breach. In addition to the normal mechanisms for claiming general damages for breach, some contracts include provisions for liquidated damages, sometimes called LADs. Liquidated damages are dealt with in the second part of this Chapter.
20.1GENERAL DAMAGES
This is not the place for a detailed discussion of the rules governing damages for breach of contract, but a brief account of the more important legal principles may be useful, before we consider specific examples from the construction field.
Purpose of an award of damages
First and foremost, it should be appreciated that damages are assessed with the intention of making the innocent party’s position (so far as money can do this) equivalent to what it would have been if the contract had been properly performed. They are not designed to recreate what the innocent party’s position would have been if the contract had never been made.
Although in principle a party is entitled to be compensated for all losses flowing from a breach of contract, this is subject to a number of important qualifications.
Remoteness
An innocent party is only entitled to compensation for those losses which are not ‘too remote’ from the defendant’s breach. To decide which losses fall within this rule, English law has adopted a complex test.1 First, an item of damage is recoverable if, at the time the contract was made, reasonable parties contemplating the kind of breach that has actually occurred would have regarded that item of damage as likely to arise in the natural course of things. To put it more briefly, damage that is reasonably foreseeable is not too remote. Secondly (and
1 Hadley v Baxendale (1854) 9 Exch 341; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd
[1949] 2 KB 528.
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alternatively) an item of damage is recoverable if such damage should have been within the contemplation of the actual parties, at the time that they made their contract. This means that what the parties could reasonably be expected to foresee depends upon their actual knowledge at the time that they made their contract.
An example of the principle of remoteness is provided by the case of Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc.2 The claimants there, who were constructing a concrete aqueduct over a main road, installed a concrete batching plant and arranged for the defendants to supply electricity to it. The claimants needed to pour all the concrete in a single continuous operation and so, when the electricity supply failed, the claimants had to demolish all the work which had been done. It was held that, although the defendants were clearly in breach of contract because of the power failure, they were not liable for the extra losses involved in the demolition and reconstruction, since the claimants had not informed them that a continuous pour was essential.
Mitigation
The doctrine of mitigation of loss means that a claimant cannot recover damages for any part of a loss which the claimant could have avoided by taking reasonable steps. Thus, for example, an employer who unreasonably refuses to let a contractor return to site during a Defects Liability Period, in order to carry out necessary remedial work, will be unable to recover the extra cost of having that work carried out by another contractor.3
Third parties
A claimant cannot normally recover damages in respect of loss which has been suffered by another person. However, the courts have recognized an important exception to this principle in construction cases. In certain circumstances an employer who has sold or let a completed building may, when defects are subsequently discovered, recover damages from a designer or contractor on behalf of the purchaser or tenant. This matter is considered in more detail in Chapter 22.
20.1.1Employer’s damages for contractor’s breach
Defective or incomplete work by a contractor normally amounts to a breach of contract. Where this occurs, an argument sometimes arises as to whether the employer’s damages should consist of the cost of putting right the deficiencies, or the (usually lesser) amount by which the value of the property is diminished. As to this, it appears that the courts will usually favour cost of repair,4 reverting to diminution in value only where it would be wholly uneconomic and/or unreasonable for the employer to insist on repair. Moreover, these are not the only
2 [1994] CILL 925.
3 Pearce & High Ltd v Baxter [1999] BLR 101.
4 East Ham BC v Bernard Sunley & Sons Ltd [1966] AC 406.
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possible measures. In Ruxley Electronics and Construction Ltd v Forsyth5 a contractor installed a swimming pool at the client’s house which was some 450 mm shallower than specification, but which complied with all relevant safety standards and was no less valuable than one of the correct depth. The House of Lords refused to award either the full cost of rebuilding the pool to the correct specification or nominal damages for diminution in value; instead, they identified the client’s true ‘loss’ as being a loss of pleasure and amenity, and awarded £2500 as damages for this.
It has been held that damages based on ‘cost of repair’ should be assessed, not at the date of breach, but rather at the date when repairs ought reasonably to have been put in hand. This ruling can be of great significance in times of high inflation, as is shown by Dodd Properties (Kent) Ltd v Canterbury CC.6 In this case (which did not involve a building contract, but a building which the defendants had negligently damaged), the claimants claimed that they were entitled to damages for the cost of repairing their premises. By the time that the case was tried, the claimants had deferred the reinstatement work for ten years. They had been waiting partly because of their financial circumstances and partly in order to be certain that the defendants, who were denying liability, would actually be held liable. It was held by the Court of Appeal that, since the claimants’ decision to defer was a reasonable one, the damages should reflect the £30,000 that the repairs would now cost, and not merely the £11,000 that they would have cost ten years earlier.
In recent years, the courts have shown increasing sympathy for the physical discomfort and emotional frustration suffered by people who, for various reasons, are compelled to live in unsuitable accommodation. This is reflected, in cases concerning defective dwellings, by awarding such victims a fairly modest additional sum of damages by way of compensation. Such awards have become almost standard practice, but the Court of Appeal in Hutchinson v Harris7 made it clear that the practice should not be allowed to extend to cases concerning business premises. No doubt every employer feels ‘vexation’ when a breach of contract occurs, but on its own this is not a sufficient basis for an award of damages.
The case last mentioned is also a good illustration of the doctrine of mitigation (mentioned above), under which claimants are required to take all reasonable steps to keep their loss to a minimum.8 An award of damages will not include anything which is found to result from the claimant’s ‘failure to mitigate’. As a result, in Hutchinson v Harris, where an architect was guilty of negligence in supervising a conversion project, the client’s claim for the loss of rental income failed. The evidence showed that the employer could easily have done what was required to render the premises lettable and then let them. Since the employer had not attempted to do this, the architect could not be held responsible for the loss. Similarly, where a contractor was not offered the opportunity to return to the site to correct the defective works, the employer was unable to recover the cost of repairs due to a failure to mitigate losses.9
5 [1995] 3 All ER 268.
6 [1980] 1 All ER 928.
7 (1978) 10 BLR 19.
8 British Westinghouse Electric Co Ltd v Underground Electric Railways [1912] AC 673. 9 Woodlands Oak Ltd v Conwell [2011] EWCA Civ 254.
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Where a contractor’s breach consists of failure to complete the contract work altogether, an additional factor comes into play. In such cases, it has been held that the damages awarded to the employer should be based on the additional cost incurred by the employer in completing the works. This will normally be what it costs to have the work completed by another contractor, less the unpaid balance of the contract price.10 If (unusually) the employer is able to complete the work for less than the outstanding balance, then the employer will only be entitled to an award of nominal damages. However, in such circumstances it may well turn out that the contractor has been overpaid for work so far carried out; if so, the employer can recover the excess under a legal doctrine known as restitution or unjust enrichment.11
20.1.2Employer’s damages for consultant’s breach
A common mistake made is to assume, in the event of a breach by a design consultant, that cost of repair expenditure on correcting defects or revised designs is recoverable against the consultant. The correct measure of the loss should be the difference between the amount spent and, crucially, the amount that would have been incurred by the employer had the consultant properly performed its obligations. Credit needs to be given for the additional costs that would have been incurred by the employer had the consultant’s designs been properly prepared in the first place. A three-part test is required:
1.The first stage is for a claimant in a claim against a construction professional for negligent design, to establish what would have happened if the construction professional had in fact exercised proper care and skill.
2.If the claimant establishes that, if the construction professional had used proper care and skill, the claimant would have proceeded with the construction of the building in accordance with the proper design carried out by the construction professional then the measure of damages will be the costs of remedying the defect but less a credit for any higher costs which would have been payable for a proper design in the first place.
3.If, however, the claimant would have abandoned the project to construct the building if the construction professional had produced a properly prepared
design, then the loss would be measured by reference to the wasted expenditure.12
These principles apply equally to claims by contractors against consultants engaged by a contractor under a design and build contract. In Costain Ltd v Charles Haswell & Partners Ltd,13 for example, additional piling was required due to defective designs. The trial judge noted that, in calculating damages due, account had to be taken of the fact that had there been no negligence, the original design would have involved a larger number of piles in the first place, and that
10Mertens v Home Freeholds Co Ltd [1921] 2 KB 526.
11Ferguson (DO) & Associates v Sohl (1992) 62 BLR 95.
12Cooperative Group Ltd v John Allen Associates Ltd [2010] EWHC 2300 (TCC).
13Costain Ltd v Charles Haswell & Partners Ltd [2009] EWHC B25 (TCC).
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Costain’s tender price for the works (the amount recoverable from the employer) would have been higher.
Liability of a contract administrator for failures to give proper advice or for failures in certification require calculation of damages based on what might have happened had the correct advice been given. This is necessarily speculative but does not mean that the court cannot come to a view. It involves damages assessed on the loss of a chance. In Chaplin v Hicks14 the court noted that the fact that damages could not be assessed with certainty did not relieve the wrongdoer of the necessity of paying damages. That case concerned a beauty contest where twelve contestants of the final 50 (out of 6,000 original entrants) were to be rewarded with places in a chorus line. The defendant, in breach of contract, prevented the claimant from taking part in the final stage. The claimant was awarded damages for the loss of a chance, assessed at 25% of winning the competition. The court appears to have proceeded on the claimant’s statistical chance of winning (as if she were a lottery player) without any actual assessment of her physical attributes against any particular criteria of beauty. In Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd15 the project manager was found to have given negligent advice. Work was let on the basis of a letter of intent and no contract was concluded with the contractor. It was held that they were in breach in that they failed to exert sufficient pressure on the contractor to finalize the contract and failed to advise the employer of the consequences of proceeding with the works. The breach of duty caused loss because had the project manager not been in breach of its duty, then the College would have taken sufficient steps to ensure that, so far as lay within its power, it procured a contract and there would have been a real and substantial chance of the contractor executing a contract that contained a provision for liquidated damages. The existence of such a contract would have been of a material benefit to the College in its dispute with the contractor when completion of the works was delayed.
20.1.3Contractor’s damages for employer’s breach
As a general principle, where an employer is guilty of a breach of a construction contract, the contractor is entitled to damages under two headings. The first is damages for any actual loss that has been suffered, and the second is damages for any profit of which the contractor has been deprived. Examples of this principle are almost unlimited, but a good idea of the kind of losses that contractors commonly suffer can be gained from Chapter 16. That Chapter deals with contractors’ claims for loss and expense under express contractual provisions, but it has long been settled that such claims are assessed in exactly the same way as damages for breach of contract.
Where the employer’s breach is sufficient to justify the contractor in terminating the contract (a matter which is dealt with in Chapter 22), the contractor is entitled to damages reflecting everything which would have been received under the contract, or the proportion of it that remains outstanding at the date of
14(1911) 2 KB 786.
15[2012] EWHC 2137 (TCC).