An extract from The Global Damages Review - 2nd edition

Overview

Under English law, the basic principle for breach of contract is that a party is entitled to be put in the same position as they would have been had they not sustained the wrong. As the name suggests, compensatory damages are intended to compensate a claimant for losses suffered as a result of the other party's (wrongful) conduct.

While the concept of compensatory damages is common to several jurisdictions, a distinctive feature of English law is the emphasis on mitigation of loss. The claimant is expected to take all reasonable steps to minimise its loss resulting from the defendant's breach of its obligations. Loss that could have been avoided through reasonable action or inaction by the claimant will not be recoverable. By corollary, if the injured party takes reasonable steps to minimise the loss incurred, the cost of these steps is recoverable and the damages owed by the defendant are reduced by the amount of the reduction of loss.

There are three main categories of recoverable damages under English law: (1) expectation damages; (2) performance damages; and (3) reliance or 'wasted expenditures' damages. Other categories of damages include moral damages, punitive or exemplary damages and non-monetary damages such as specific performance, but this chapter's focus is on compensatory damages.

Expectation damages are awarded to put the claimant in the position it would have been in but for the breach. The ability of a claimant to recover lost profits will depend on the subject of the breach. There are two types of 'expectation damages': normal or direct damages (also known as general damages), and consequential damages (also known as special damages). Normal or general damages follow as a natural and probable consequence of a breach, whereas consequential damages are those that do not flow directly from the breach and are particular to the injured party and can therefore be difficult to calculate in financial terms.

Performance damages compensate the cost of curing the defective performance and 'wasted expenditures' or 'reliance damages' compensate the losses or expenditures incurred by the claimant in reliance on the contract. These damages are aimed at putting the claimant in as good a position as he or she was in prior to the promise.

Recent case law

i Triple Point Techology Inc v. PTT Public Co Ltd [2019] EWCA Civ 230Facts

In a contract for commodities trading software, an issue of principle arose in this appeal as to how to apply a clause imposing liquidated damages for delay in circumstances where the contractor never achieved completion.

Triple Point Technology Inc (Triple Point) designs, develops and implements software for use in commodities trading. PTT Public Co Ltd (PTT) undertakes commodities trading. Both companies entered into a Contract for Commodity Trading and Risk Management System (Contract) for the provision of relevant commodities software within 460 calendar days. Under Article 5 of the Contract, Triple Point would pay damages for delay at the rate of 0.1 per cent of undelivered work per day. The Contract provided for payment in three phases and Triple Point completed Phase I of the Contract 149 days late. When Triple Point requested further payment, PTT refused because Triple Point had not completed the next phase of work. Unwilling to continue work until further payment, Triple Point suspended work and left the site. PTT then terminated the Contract for wrongful suspension of work. Triple Point commenced an action to recover the outstanding sums claimed in its invoices. In response, PTT claimed damages for delay and damages due upon termination of the Contract. The court dismissed Triple Point's claims and awarded PTT liquidated damages for the delay in completing Phase I of the work and on all other phases until the termination of the Contract pursuant to Article 5.3 of the Contract. On appeal, Triple Point contended that Article 5.3 of the Contract does not apply and PTT cannot recover damages at the rate of 0.1 per cent per day until termination. Triple Point argued that Article 5.3 applies only when work is delayed, but subsequently completed and then accepted; it does not apply in respect of work that the employer never accepted.

Decision

After a review of the authorities, the court identified three approaches that have emerged in cases where a contract provides for liquidated damages for delay, the contractor fails to complete the task and a second contractor steps in. In such cases, the courts have held in different circumstances that: (1) the clause for liquidated damages does not apply at all; (2) the clause for liquidated damages applies only until termination of the first contract; or (3) the clause for liquidated damages continues to apply until the second contractor achieves completion of the work of the first contractor. The court found that there is no strict rule that a provision for liquidated damages must be used as a formula to compensate the defendant and in all cases, the court's approach will depend on the wording used in the contract. Here, the clause focused specifically on delay between the contractual completion date and the date when the work was actually completed. Accordingly, it had no application in a situation where the contractor never handed over completed work to the employer. In such circumstances, the remedy would be general damages for delay. PTT was therefore only entitled to liquidated damages according to Article 5.3 of the Contract for the 149 days' delay to completion of Phase I by Triple Point but not the delay in completion of the remaining two phases. For these two phases, PTT could claim only damages in accordance with ordinary principles.

Significance of the decision

This decision offers some clarity on the interpretation of contractual provisions for liquidated damages. The case demonstrates that all three different approaches are potential options for interpreting a liquidated damages clause in an agreement. This decision once again emphasises the importance of the parties' contractual agreement and the continuing readiness of the court to give effect to liquidated damages clauses in commercial contracts, provided it is not a penalty. It is therefore crucial for parties to set out in clear terms what the desired outcomes would be where there is delay in completion of works. One practical use would be to make clear that the liquidated damages clause would continue to apply up until termination of the contract and no further, or that the clause continues to apply even after the termination of the contract up until the completion of all outstanding works by a second contractor. This decision has not restricted the construction of liquidated damages clause to one of the three identified approaches, and means that parties can decide on the effects of their contract by clear drafting of such clauses.

ii Oversea-Chinese Banking Corporation Ltd v. ING Bank NV [2019] EWHC 676 (Comm)Facts

A key issue in this case was whether the measure of damages sought by the claimant was recoverable as a matter of law.

The claimant sued the defendant for breach of warranty under a sale and purchase agreement (SPA) for the shares in a target company (IAPBL). Under the SPA, the defendant warranted that IAPBL's accounts were properly drawn up and gave a true and fair state of affairs as at the end of 2008. The claimant alleged breach of the warranty because the accounts failed to disclose a liability to Lehman Brothers Finance SA (LBF), which was later settled after the completion of the purchase of IAPBL. This resulted in payment of US$14.5 million to LBF, which the claimant sought to recover in this action. If the substantial liabilities had been disclosed, the claimant argued the SPA would have contained a specific warranty or indemnity in the claimant's favour in respect of the true liability to LBF. The claimant contended that on a claim for breach of warranty of quality on a share sale, the measure of damages claimed could be a hypothetical indemnity and the amount that could have been claimed under that hypothetical indemnity. On the other hand, the defendant argued such measure of loss is not available and the claimant can only recover the difference between the true value of the shares and the value of the shares as warranted.

Decision

The court held that the established measure of loss for breach of warranty on a share sale is the difference between the value of the shares as warranted and their true value (diminution in value). It is a basic principle in awarding damages that the claimant is entitled to be put in the position he or she would have been in if the contract had never been broken. The court therefore rejected the claimant's contention that its loss was referable to a hypothetical indemnity, which it would have negotiated and obtained had the warranted accounts been properly drawn up. It found that such measure of damages suggested by the claimant is unsustainable in law. It upheld that the measure of damages for breach of warranty of quality on a share sale was the diminution in value of the company. The diminution in value is the only appropriate measure of damages, although it may be possible to adjust the valuation methodology as appropriate to arrive at the value of the diminution.

Significance of the decision

This decision highlights the certainty for which English jurisprudence has proved attractive. The diminution in value is the settled measure of damages as it reflects the loss suffered on a breach of warranty in a share sale. A rejection of a hypothetical indemnity means that in future cases claimants must formulate their claim for damages to accord with the extant principle for assessment of damages. The court is unlikely to award any claim on an untested principle, even where a defendant has breached the warranty.

iii One Step (Support) Ltd v. Morris-Garner [2018] UKSC 20Facts

This case considered when negotiation damages (known as Wrotham Park damages) can be awarded and the legal basis that should guide such an award.

One Step (Support) Limited (One Step) had purchased from the appellants a business providing support for young people leaving care. An important part of this agreement was that the appellants were bound by restrictive covenants preventing them from competing with One Step or from soliciting business from One Step's clients for at least three years. The appellants breached this restrictive covenant by setting up a company that provided competing services to those of One Step. One Step sought an account of profits or alternatively 'negotiation damages' under the principles of Wrotham Park Estate Co Ltd v. Parkside Homes Ltd. One of the reasons given by One Step for seeking negotiation damages was the difficulty in establishing the loss the business suffered as a result of the employees' conduct. The trial court held that One Step was entitled to judgment for damages assessed on a Wrotham Park basis or, alternatively, ordinary compensatory damages. One Step elected for damages on the Wrotham Park basis. The Court of Appeal confirmed this decision and the appellants appealed to the Supreme Court.

Decision

Allowing the appeal, the Supreme Court held that the lower court wrongly applied the Wrotham Park principle, and provided clarification on the correct application of the Wrotham Park principle and granting 'negotiation damages'.

The Court observed that the hypothetical fees that the parties would have agreed for release of contractual damages for breach of contract under the Wrotham Park principle were not compensatory damages. It clarified that common law damages for breach of contract were not a matter of discretion for the judge, but claimed as of right, and awarded on the basis of legal principles. The courts are not justified in granting negotiation damages just because it was difficult to quantify the financial loss, and negotiation of damages was considered to be a just response. Accepting that financial loss in the present case scenario was difficult to quantify, the Court held that it was still a 'familiar type of loss for which damages were frequently awarded and could be quantified in a conventional manner'. Therefore, the hypothetical release fee is not itself the measure of the claimant's loss in this case. The Supreme Court remitted the case back to the High Court to assess the damages actually suffered by One Stop.

Significance of the decision

This is the first decision by the UK's highest court to review extensively the grant of negotiation damages, with an examination of previous cases on this point. The Supreme Court emphasised the traditional rationale for the award of damages, which is that damages are intended to compensate a claimant for loss or damage resulting in the breach of an obligation and negotiation damages are no different. By emphasising the compensatory purpose for an award of damages, including negotiation damages, the Court has provided some level of clarity to the award of this head of damages. Negotiation damages would no longer be awarded by reference to a hypothetical negotiation damages and would going forward, as with other damages, be assessed and awarded based on the actual financial loss suffered by a claimant for the breach of contract. There would likely be less scope for litigants to rely on the lack of clarity in previous cases to claim damages that do not correspond with actual loss suffered because of the breach of contract. A claimant cannot elect how its damages should be assessed and in that way receive a windfall. However, the decision does not take away the difficulty of quantifying the actual loss, a fact that the Court recognised.

iv Axa Insurance UK Plc v. Financial Claims Solutions Ltd [2018] EWCA Civ 1330Facts

This case considered when it would be appropriate to award exemplary damages, especially in situations where the defendant has made no profit and there are alternative avenues for sanctioning the defendant's wrongful conduct.

The defendants committed serious fraud by issuing two sets of fictitious personal injury claims based on fake documents to the insurance companies. The claimant insurance company conducted an investigation, discovered the claimant's fraudulent conduct and brought claims against the defendants seeking both compensatory and exemplary damages. The lower court awarded compensatory damages to cover the cost incurred in unravelling the fraud, but rejected the defendant's claim for exemplary damages. The reasoning of the court was that the fraud was discovered before the defendants made any profits and, therefore, the second category of Rookes v. Barnard did not apply. The court also suggested that because of the availability of other avenues, such as the criminal courts and the contempt of court jurisdiction as punishment for the conduct of the defendants, exemplary damages could not be awarded. The defendant appealed.

Decision

On appeal, the Court of Appeal held that the lower court wrongly applied the decision in the Rookes case. The Court explained that the second category of Rookes applies to cases where 'the defendant's conduct has been calculated to make a profit for himself which may well exceed the compensation payable to the claimant'. In the present case, the compensatory damages granted were limited to the cost of investigation, which was a much lesser sum compared to the profit the defendants would have made had the fraud been successfully executed. The Court observed that exemplary damages are 'available for the case where compensatory damages are inadequate to remove the wrongful gain achieved by the tort' and they are punitive in nature. The Court further observed, 'the second category requires the Court to analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve'. Given the seriousness of the claim and the need to deter and punish the outrageous conduct and abusive behaviour, the Court awarded exemplary damages. The possibility of criminal or contempt proceedings against the defendants is irrelevant to the question of whether or not exemplary damages is to be awarded.

Significance of the decision

The Court considered that this case was a 'paradigm' for the award of exemplary damages. Exemplary damages would rarely be awarded, but would always be available as a measure of the court's disapproval of outrageous conduct and abusive behaviour, and to deter and punish such conduct. When the wrongdoer has calculated that the benefit to be derived from the wrongful conduct may well exceed any compensation he or she has to pay the claimant, it would not matter whether the profit was, in fact, made. The Court also affirmed that, in deserving cases, exemplary damages can still be awarded even if other alternatives exist for the sanction of the wrongful conduct.