Damages — expectation and reliance

Damages for breach of contract are principally compensatory. The orthodox measure is the expectation measure: the claimant is to be placed, so far as money can do it, in the position in which he or she would have been had the contract been performed. That proposition, associated above all with Robinson v Harman, is the remedial expression of the binding force of contract. Contract law does not merely reimburse expenditure incurred in making or relying upon a bargain; it protects the promised performance itself.

The central distinction for Week 13 is therefore between expectation loss and reliance loss. Expectation loss asks what the claimant would have had if the defendant had performed. Reliance loss asks what the claimant has spent or lost by relying on the contract. The two are not cumulative ways of recovering the same disappointment. They are alternative techniques of measuring compensation. Expectation is the norm; reliance may be used where expectation is too speculative, where expenditure is the best available proxy for the value of performance, or where the claimant elects to frame the claim in that way. But reliance cannot normally be used to escape a bad bargain. If performance would have left the claimant worse off, damages cannot put the claimant in a better position than performance would have done.

The topic is best studied as a sequence of questions. First, identify the contractual obligation breached. Secondly, ask what interest the claimant seeks to protect: performance profit, the value of promised performance, cost of cure, loss of amenity, wasted expenditure, or consequential loss. Thirdly, apply the limiting doctrines: causation, remoteness, mitigation, certainty, and the compensatory principle. Fourthly, check whether the claimant is trying to combine incompatible measures.

For Durham first-year purposes this topic draws together much of the module. Week 4 matters because the term breached defines the expectation. Week 5 matters because an exclusion clause may limit or remove damages. Week 6 matters because misrepresentation has different remedial principles. Week 11 matters because breach and discharge determine whether damages are available. Week 12 matters because frustration terminates future obligations without breach. In an examination, damages questions are rarely about arithmetic alone. They test whether the claimant has correctly characterised the loss and whether that loss is legally recoverable.

The best answers avoid two extremes. One error is to recite Robinson v Harman as if it solves every issue. It does not. The other is to treat reliance as an equitable sympathy remedy for any wasted expenditure. It is not. Reliance damages operate within, not outside, the compensatory structure of contract. The hard cases, especially Ruxley, The Golden Victory and The Achilleas, show that the expectation measure is powerful but not mechanical.

The modern law of contractual damages grew out of the common law action for breach of promise rather than from any general moral theory of compensation. By the nineteenth century the courts had settled upon the idea that breach of contract is a civil wrong for which money is the ordinary response, but the content of the monetary response required articulation. Robinson v Harman supplied the canonical formulation: money should, so far as possible, put the innocent party in the position in which performance would have placed him. That formula was not merely a damages rule. It reflected the development of contract as a law of bargains, in which the promised exchange is legally protected.

Hadley v Baxendale then supplied the main limiting principle. The expectation measure could otherwise expose a contract-breaker to indeterminate liability for all consequences factually flowing from non-performance. The Exchequer Court limited recoverability to losses arising naturally in the ordinary course of things or losses within the reasonable contemplation of both parties because of special circumstances known at the time of contracting. Thus the law combined a strong promise-protecting measure with a boundary based on assumed responsibility and reasonable foreseeability.

The reliance measure has a more complicated history. In one sense it is older than expectation, because expenditure and detriment are visible forms of loss. In another sense it is conceptually subordinate to expectation in contract. The claimant does not recover because reliance itself makes the promise binding; consideration and intention do that work. Reliance matters remedially because it may evidence the economic consequences of breach and because some expectations, especially profits from new ventures, cannot be proved with sufficient certainty.

Twentieth-century authorities refined this relationship. Anglia Television v Reed allowed recovery of pre-contract and post-contract expenditure wasted by the actor's breach, because the defendant could reasonably be treated as accepting liability for such expenditure if he repudiated. CCC Films went further in a difficult evidential setting: where lost profits from film distribution could not be proved, wasted expenditure was recoverable, and the defendant bore the practical burden of showing that the expenditure would not have been recouped. But C&P Haulage v Middleton imposed an important discipline: reliance cannot be used to recover expenditure which, on performance, would never have yielded a benefit to the claimant.

The late twentieth and early twenty-first centuries then exposed deeper tensions within the expectation principle. Ruxley showed that the cost of producing literal conformity may be unreasonable where the breach causes no measurable diminution in market value. The House of Lords awarded a modest sum for loss of amenity rather than the much larger cost of rebuilding a swimming pool. The Golden Victory and Bunge v Nidera asked whether post-breach events should be considered when assessing the value of the lost bargain. The Achilleas questioned whether remoteness is adequately captured by foreseeability alone, emphasising whether the defendant can fairly be taken to have assumed responsibility for the particular type of loss.

The history is therefore not a simple march from reliance to expectation. It is the history of a remedial system balancing three concerns: the promisee's entitlement to performance, the need to avoid overcompensation, and the need to keep contractual liability within the risk undertaken by the promisor.

1. Expectation is the prima facie measure. The starting point is Robinson v Harman: damages should place the claimant, so far as money can do it, in the same position as if the contract had been performed. This may be measured by lost profits, diminution in value, cost of cure, loss of a chance, or another financial proxy for performance. The correct measure depends on the nature of the contractual obligation and the loss actually suffered.

1. Expectation is not identical with profit. In many commercial cases the claimant's expectation is the net profit that performance would have produced. But expectation may also consist in receiving conforming goods, a completed building, a service of a specified quality, or the opportunity to exploit an asset. Where substitute performance is available, damages may be the additional cost of obtaining it. Where goods have an available market, sale of goods legislation uses the market difference as a prima facie measure.

1. Reliance is usually an alternative, not an addition. Reliance damages compensate expenditure incurred in reliance on the contract which has been wasted by the breach. The claimant cannot recover both the full profit expected from performance and all expenditure incurred to earn that profit if doing so would double count. Ordinary business expenses are usually deducted in calculating net profit. Reliance becomes especially important where profit is too uncertain to prove.

1. Reliance may include pre-contract expenditure in a suitable case. Anglia Television v Reed is the leading English authority. The television company had spent money before and after hiring the actor. When he repudiated, the production collapsed. The Court of Appeal allowed recovery of wasted expenditure, including pre-contract expenditure, because the actor knew the kind of project into which he was entering and must have contemplated that such expenditure would be wasted if he failed to perform. The point is not that pre-contract expenditure is always recoverable. It must have been within the parties' contemplation and wasted by the breach.

1. Reliance cannot normally avoid a bad bargain. This is the lesson of C&P Haulage v Middleton. The claimant cannot say: because my expected profit is nil or negative, I will instead recover expenditure which performance would have left me unable to recoup. Contract damages protect against breach, not against the claimant's own unprofitable bargain. The conceptual point is that damages should not put the claimant in a better position than performance would have done.

The leading authorities form a coherent remedial map. Robinson v Harman gives the destination: performance value. Hadley v Baxendale draws the boundary: only losses within the ordinary course or the parties' contemplation are recoverable. Anglia Television v Reed and CCC Films explain when wasted expenditure may be used as an alternative measure. C&P Haulage prevents the reliance measure from becoming a device for escaping a losing contract. Ruxley addresses the valuation of defective performance where literal cure is disproportionate. The Golden Victory, The Achilleas and Bunge v Nidera refine the compensatory principle in commercial settings.

Robinson v Harman should be cited for the orthodox expectation principle, but it should not be treated as a slogan. It assumes that the court can identify the position performance would have produced. Where that position is uncertain, impossible, or subject to later events, further analysis is required.

Hadley v Baxendale is equally indispensable. The case is not about expectation versus reliance in a narrow sense; it is about limiting recoverable expectation or reliance loss. A claimant may spend money in reliance on a contract, but if the defendant could not reasonably have contemplated that type of loss, it will be too remote. The case therefore controls both measures.

Anglia Television v Reed is the standard reliance authority. It matters because the claimant could not sensibly prove what profit the abandoned television film would have made. The court therefore allowed wasted expenditure, including expenditure incurred before the defendant's contract, because the production context made such expenditure foreseeable. The case is often over-read. It does not say that all sunk costs are recoverable whenever a contract is broken.

C&P Haulage v Middleton supplies the necessary corrective. The claimant had no entitlement to remove improvements at the end of the licence. His expenditure would have been lost even if the defendant had performed. Recovery would therefore have overcompensated him. This case should be used whenever a problem question contains a claimant trying to recover set-up costs without showing that performance would have recouped them.

Ruxley is the most important defective performance case. It demonstrates the law's unwillingness to award an extravagant cost of cure where the claimant has received substantially the promised benefit but not precise conformity. The award for loss of amenity recognises that subjective contractual objectives can matter, but it keeps the award within compensatory limits.

The Golden Victory and Bunge v Nidera are essential for the valuation date. They show that the compensatory principle may require the court to consider events after breach if those events reveal the value of the contractual rights lost. The Achilleas then adds a further sophistication to remoteness: commercial liability depends not only on foreseeability in the abstract but on the risks which the contract-breaker can fairly be taken to have undertaken.

See practice questions section below.

See further reading section below.