When a breach occurs in terms of an agreement, the innocent party to the agreement is entitled to claim damages for such breach. However, the common law and the agreement itself can place limitations on the extent to which the defaulting party would be liable for the damages suffered as a result of the breach.
The common law of contract draws a distinction between general and special damages suffered. General damages are damages considered to flow naturally and generally from a breach in the normal course of events and are recoverable without a need to prove anything more. This is because the law presumes that the contracting parties could reasonably have foreseen all natural consequences of breach of contract at the time of conclusion of the contract. The innocent party need only prove that the particular damage was of the kind that flows naturally and generally from the type of breach in question.
Examples of general damages will include the loss of interest resulting from a failure to pay a sum of money; damages that result from the use of a product for its normal purpose; and regulatory fines imposed in the event of the breach of a statutory duty. Interestingly, loss of profit is generally not recoverable as general damages, but as special damages.
A defaulting party will only be liable for special damages if two things can be proven: First, the innocent party must prove that there are special circumstances which make it reasonable to presume that the contracting parties contemplated the damage as a probable result of the breach of contract. This is known as the contemplation requirement and similar to the well-known ‘reasonable foreseeability’ test in English law. Secondly, it must also be proved that the contracting parties entered into the contract with these special circumstances in mind or, more strictly formulated, that the parties had agreed, expressly or tacitly, that there would be liability for such damages. This is known as the convention requirement.
A court will need to be convinced, on a balance of probabilities, of the existence of an agreement whereby the defaulting party undertook to pay the special damages claimed. Factors to consider in determining what a defaulting party can be expected to have known and foreseen when contracting: expertise and knowledge, the commercial context of the contract, the scope and purpose of the contract and previous dealings between the contracting parties. Unfortunately, for an innocent party, the limitations to recover damages suffered do not stop there. Such damages can be limited even further in the agreement by:
(i) capping the amount recoverable for special damages to not exceed a certain amount and/or
(ii) by excluding liability for special damages in terms of a limitation of liability or exemption clause.
An exemption clause deprives contracting parties of rights that they would otherwise have had at common law. These clauses are therefore interpreted restrictively within the normal confines of interpretation, especially where the exemption clause is couched in wide language or in general terms that do not exclude liability on specific grounds. However, the courts will not interfere with exemption clauses if the language is clear enough to be given its clear meaning. Liability for intentional or fraudulent misrepresentation or fraudulent conduct cannot be excluded by exemption clauses. In the absence of legislation regulating unfair contract terms and where a provision does not offend public policy or considerations of good faith, careful construction of the contract itself should ensure the protection of the party whose rights have been limited, but also give effect to the principle that the other party should be able to protect themselves against liability insofar as it is legally permissible. Exemption clauses can furthermore exclude any liability whether in contract, delict, under statute or otherwise for any special, indirect or consequential loss or damage. In this instance, an innocent party’s rights are even more restricted when it is precluded from bringing an action based on a delict of loss of profits, rather than the contractual arrangement. Should the agreement contain such an exemption clause, the innocent party will be precluded from bringing an action based on delict.
An innocent party to a contractual arrangement can prevent the extent to which its rights to claim damages are limited in a contractual arrangement. Parties should give specific thought to these clauses as only damages which were foreseeable at the time of conclusion of the agreement and agreed to, will be recoverable as special damages, taking into consideration the nature of the agreement, business model and operations of the contracting parties. It is thus key that both parties are extensively involved in the drafting and negotiation process of any agreement and that the clauses addressing recovery of damages and exemption thereof, be drafted meticulously.