Damages — expectation and reliance

Damages are the principal remedy for breach of contract. The orthodox measure 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). Two alternatives qualify the orthodox measure. The reliance measure restores the claimant to the position they would have been in had the contract not been made. The restitution measure (sometimes called negotiating damages or Wrotham Park damages) requires the defendant to disgorge a portion of the gain made through the breach.

This week studies the three measures, the rules on remoteness (the Hadley v Baxendale test, qualified by The Achilleas), and the duty to mitigate. The topic builds directly on W11 (discharge by performance and breach) and W12 (frustration), and it interacts with W3 (consideration — the bargained-for benefit being protected), W6 (misrepresentation — different remedies under the Misrepresentation Act 1967), and W8 (duress — different doctrinal route to recovery).

The orthodox expectation measure was articulated in Robinson v Harman (1848) 1 Ex 850 by Parke B at 855: ''where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed''. The principle has been the doctrinal anchor of contract damages for over 175 years.

The nineteenth century articulated the remoteness rules. Hadley v Baxendale (1854) 9 Exch 341 established the two-limb test: damages recoverable for losses (a) arising naturally from the breach (the first limb), or (b) reasonably contemplated by the parties at the time of contracting (the second limb). The case is the foundational text on remoteness in contract.

The twentieth century elaborated the measures. Anglia Television Ltd v Reed [1972] 1 QB 60 confirmed the reliance measure as an alternative to expectation where expectation cannot be calculated. C & P Haulage v Middleton [1983] 1 WLR 1461 limited the reliance measure where the contract would have produced a loss for the claimant in any event. Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 established the negotiating-damages measure for breach of restrictive covenant.

The twenty-first century has produced significant doctrinal innovation. Attorney General v Blake [2001] 1 AC 268 introduced an account of profits remedy for exceptional cases of contract breach. Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48 modified the Hadley v Baxendale remoteness test to require assumed responsibility for losses of an unusual type. Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 clarified the doctrinal basis of Wrotham Park damages and confined them to cases where the claimant has lost a valuable asset, restricting the previously expansive use of the measure.

(1) The expectation measure. Robinson v Harman. Damages place the claimant in the position they would have been in had the contract been performed. The measure is the difference between the claimant''s position post-breach and the position they would have occupied had performance occurred. In a sale of goods, expectation damages are typically the difference between the contract price and the market price at the date of breach. In a construction contract, expectation damages are typically the cost of completion or the diminution in value of the property, whichever is appropriate (Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344 — diminution where cost of completion is disproportionate).

Five graded practice questions in the panel below — two foundation on Robinson v Harman and Hadley v Baxendale, two standard on The Achilleas and Ruxley, one challenge on Morris-Garner and account-of-profits.

See the Further Reading panel for Treitel, Burrows, Atiyah, the Fuller and Perdue article on the reliance interest, and the post-Morris-Garner academic commentary.