Damages — expectation and reliance

The orthodox measure of contract damages is the expectation interest: damages should put the claimant in the position they would have been in had the contract been performed (Robinson v Harman (1848) 1 Ex 850). This protects the value of the bargain agreed between the parties. Two alternatives qualify this measure: the reliance interest (restoring the claimant to their pre-contract position) applies where expectation cannot be calculated; and negotiating damages (the hypothetical sum for waiving the breached right) apply in confined circumstances involving loss of a valuable asset. Damages are subject to remoteness rules under Hadley v Baxendale (1854) 9 Exch 341, modified by The Achilleas [2008] UKHL 48 where market practice indicates different risk allocation, and the claimant must mitigate their loss.

Robinson v Harman (1848) 1 Ex 850: Parke B established that damages place the claimant "in the same situation, with respect to damages, as if the contract had been performed". The foundational principle governing contract damages for 175 years.

Hadley v Baxendale (1854) 9 Exch 341: Damages recoverable for losses (a) arising naturally from breach or (b) reasonably contemplated by parties at time of contracting. Establishes the two-limb remoteness test that remained unmodified until 2008.

The Achilleas [2008] UKHL 48: Late return of chartered ship caused loss of valuable follow-on charter; House of Lords held loss irrecoverable despite foreseeability because market practice confined liability to rate differentials. Introduces assumed-responsibility qualification to remoteness where market practice or contractual structure indicates different risk allocation.

Ruxley Electronics v Forsyth [1996] AC 344: Swimming pool built nine inches shallower than specified; cost of reconstruction (£21,560) disproportionate to nil diminution in value. Establishes that where cost of cure is disproportionate, diminution in value applies, with possible loss-of-amenity supplement (£2,500 awarded).

Morris-Garner v One Step [2018] UKSC 20: Breach of non-compete covenants; Supreme Court rejected negotiating damages claim. Confines Wrotham Park damages to cases involving loss of valuable asset that could have been monetised through release, not available as general alternative to expectation damages.

Courts apply a sequential analysis. First, identify the appropriate measure: expectation is default; reliance only if expectation too speculative (Anglia v Reed); negotiating damages only for asset loss (Morris-Garner). Second, calculate quantum: for sales, typically contract price minus market price at breach date; for services, cost of substitute performance or diminution in value if cost disproportionate (Ruxley). Third, apply remoteness filter: losses must either arise naturally (first limb) or be contemplated at contracting (second limb), subject to Achilleas assumed-responsibility test where market practice differs. Fourth, deduct for failure to mitigate: claimant must take reasonable steps to minimise loss. Common triggers include late delivery (remoteness issues), defective performance (cost of cure versus diminution), and breach of restrictive covenants (negotiating damages availability).

Treating damages measures as freely electable: Students wrongly assume claimants can choose between expectation, reliance, and negotiating damages. Each has specific availability requirements—expectation is default, alternatives need justification. Ignoring The Achilleas: Applying only orthodox Hadley v Baxendale without considering whether market practice indicates different risk allocation. Conflating contract and tort remoteness: Contract requires "not unlikely" (more demanding); tort requires only reasonable foreseeability. Missing Ruxley proportionality: Automatically awarding cost of cure without considering whether disproportionate to benefit. Overextending Blake: Treating account of profits as generally available rather than confined to exceptional cases with legitimate interest in preventing profit.