Assess breach of contract damages: 10 steps
Just because you have been the victim of a breach of contract, does that mean you are entitled to breach of contract damages – and if so, how much will they be? It is critical, before beginning a claim, to evaluate realistically what it might be worth.
In this insight we
- Look at the rules on damages for breach of contract.
- Discuss how those rules apply.
- Provide examples.
Most people are aware when a breach of contract has occurred and that an award of damages could arise. But few know how damages are calculated by the courts.
Damages after a contract breach rarely equate to the amount the innocent party calculates as their loss and under UK law, damages rarely include an amount as compensation.
Damages can be made up of various elements, some less obvious and less common than others. It is important for a party who has a claim for breach of contract against a defaulting party to consider any likely award of damages before issuing a claim. We can then check whether the claim is worthwhile.
Damages are usually awarded to an injured party for losses suffered as a result of the defaulting party’s actions or non-actions. The purpose of an award of damages for breach of contract is to put the injured party in the position it would have been in had the contract been performed.
Steps to assess breach of contract damages
Consider the following steps when assessing damages:
1 When did the breach occur?
This is normally the date used for the assessment of damages.
2 What is the financial loss caused?
This includes costs or liabilities incurred by the injured party to a third party. It also includes any profits which may be lost by the injured party as a result of the breach.
3 What is the difference in value or the cost of cure?
Often, the injured party can pay a third party to reinstate it to the position it would have been in had the contract been performed. This cost may be recovered by the injured party if the cost was incurred reasonably. A party can still receive damages even if a cure is not undertaken. Note, a claimant has to mitigate its loss, not aggravate it.
4 Has there been a loss of management time?
This may occur where the injured party’s staff had to investigate the breach or deal with the consequences of the breach. The injured party may recover its staff’s wages. However, this type of claim can be difficult to prove.
5 Has there been a non-acceptance of goods or non-delivery of goods?
If a buyer of goods refuses to accept the delivered goods, refuses to pay for them or where the goods have not been delivered at all then the damages are presumed to be the difference between the market value of the goods and the contract price.
6 Are the goods defective?
The damages in this case would be the difference between the value of the goods at the time of delivery and the value of the goods had they not been defective.
7 Has there been any mental distress or loss of amenity caused?
English law rarely allows damages of this type to be successfully claimed for contract breach. There are some exceptions such as where it can be established that an important object of the contract was to give pleasure or relaxation, for example a holiday. This type of award will be rare in commercial cases.
8 Did the breach cause the loss?
This is a key question and a common area for mistakes by claimants. Not every breach can be legally proven to have resulted in loss and if a claimant cannot satisfy this test, notwithstanding a breach of contract, damages will not be awarded. The injured party must consider the position it was in after the breach and the position it would have been “but for” the breach – which of course is hypothetical.
9 Has there been a mitigation of loss?
This means that the injured party has taken reasonable steps to avoid or reduce its loss and has not acted unreasonably to increase its loss. For example, if a supplier fails to deliver goods it will be necessary for the buyer to take all reasonable steps to find an alternative supplier at best price. If that buyer simply buys replacement goods from another seller at a much higher cost without investigating all options, this would be highly unlikely to be adequate mitigation of loss.
10 Is the damage too remote?
The loss must be in the reasonable contemplation of the parties at the time the contract was made, i.e. it flows directly and naturally from the breach, or was reasonably foreseeable.
Damages for breach of contract
It can be difficult for parties to a contract to assess and quantify what damages may be recovered where a breach of contract has occurred. It is usually worth seeking advice on these issues before bringing a claim in order to determine whether it is viable and whether a deal can be done without the need for litigation.
John Deane is a partner in the commercial dispute team. Prior to bringing a claim, it will be necessary to seek legal advice on both liability, and if that can be proved, the expected loss. We assess both aspects for you.