Remedies for Breach of Contract

When a contract is breached, the innocent party is entitled to a remedy. The primary remedy in English contract law is damages (monetary compensation). In exceptional cases, equitable remedies such as specific performance and injunction may be available. This lesson examines the principles governing the assessment of damages, the rules on remoteness and mitigation, the distinction between liquidated damages and penalty clauses, the equitable remedies, and consumer remedies under the Consumer Rights Act 2015.

---

Damages

Damages are the primary remedy for breach of contract. The aim is to put the innocent party in the position they would have been in had the contract been performed — the "expectation interest." This is sometimes called the "performance interest."

The Expectation Interest

The innocent party can recover expectation loss — the financial benefit they expected to receive from the contract.

For example, if A contracts to buy goods from B for £500, and B fails to deliver, and the goods would have been worth £800, A's expectation loss is £300 (the profit they would have made).

The Reliance Interest

Alternatively, the innocent party can recover reliance loss — the expenditure they have incurred in reliance on the contract.

In Anglia Television Ltd v Reed [1972], the claimant television company hired an actor for a film. The actor repudiated the contract. The company could not find a replacement and abandoned the project. They could not prove what profit they would have made (expectation loss), so instead they claimed the wasted expenditure (reliance loss) — the money spent on directors, designers, and production costs before the actor was hired. The Court of Appeal held that reliance loss was recoverable, including pre-contractual expenditure, provided it was reasonably within the contemplation of the parties.

Note: A claimant cannot claim both expectation and reliance loss for the same item — this would amount to double recovery. However, they can choose whichever measure is more favourable.

Cost of Cure vs Difference in Value

Where defective work has been performed, the court must decide between two measures of damages:

Measure	Explanation
Cost of cure	The cost of putting the defect right
Difference in value	The difference between the value of what was promised and the value of what was received

In Ruxley Electronics and Construction Ltd v Forsyth [1996], a swimming pool was built 18 inches shallower than specified (6 feet instead of 7 feet 6 inches). The cost of rebuilding the pool was £21,560, but the difference in value was nil (the pool was perfectly usable). The House of Lords awarded £2,500 for loss of amenity — the cost of cure was disproportionate, and the difference in value did not reflect the claimant's legitimate interest.

---

Remoteness of Damage

Not all losses caused by a breach are recoverable. The innocent party can only recover losses that are not too remote — i.e., losses that were within the reasonable contemplation of the parties at the time of contracting.

The Rule in Hadley v Baxendale (1854)

The leading case on remoteness is Hadley v Baxendale (1854). A mill shaft broke and the mill owners sent it to the defendants for delivery to an engineer for repair. The defendants delayed the delivery, and the mill was idle for longer than necessary. The mill owners claimed for lost profits.

Baron Alderson established the two-limb test:

Limb	Rule	Application
Limb 1	Losses arising naturally from the breach — in the ordinary course of things	The "normal" consequences of the breach
Limb 2	Losses that were in the reasonable contemplation of both parties at the time of contracting, as a probable result of the breach	"Special" losses that the defendant knew about because of special knowledge

The mill owners' claim failed under Limb 2 — the carrier did not know that the mill would be idle while the shaft was being repaired (the mill might have had a spare shaft).

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949]:

The defendants sold a boiler to the claimants (a laundry business) and delivered it five months late. The claimants claimed for:

1. Ordinary loss of profits from the laundry business — this was recoverable under Limb 1 because the defendants knew the boiler was for a laundry business, and loss of profits was a natural consequence
2. Loss of a lucrative government dyeing contract — this was not recoverable because the defendants did not know about this special contract (Limb 2)

graph TD
    A["Loss caused by<br/>breach of contract"] --> B{"Is the loss<br/>too REMOTE?"}
    B --> C["LIMB 1:<br/>Arising NATURALLY<br/>from the breach?<br/>(Ordinary course of things)"]
    B --> D["LIMB 2:<br/>In the REASONABLE<br/>CONTEMPLATION of both<br/>parties at time of contracting?<br/>(Special knowledge)"]
    C -->|"Yes"| E["Loss is RECOVERABLE"]
    C -->|"No"| D
    D -->|"Yes — defendant<br/>had special knowledge"| E
    D -->|"No — defendant did<br/>not know"| F["Loss is TOO REMOTE<br/>and NOT recoverable"]

    style E fill:#27ae60,color:#fff
    style F fill:#e74c3c,color:#fff

The Achilleas [2008]:

The House of Lords considered whether a broader test of "assumption of responsibility" should replace the Hadley v Baxendale test. Lord Hoffmann suggested that the question should be whether the defendant had assumed responsibility for the type of loss in question. However, the majority applied the traditional Hadley v Baxendale test, though some Lords expressed sympathy for the assumption of responsibility approach. The precise scope of the test remains debated.

---

Mitigation

The innocent party has a duty to take reasonable steps to mitigate (reduce) their loss. They cannot recover for losses that they could reasonably have avoided.

In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912], the claimant was supplied with defective turbines. They replaced them with superior turbines that were more efficient than the contract turbines. Viscount Haldane LC held that the claimant could recover the cost of the replacement turbines but had to give credit for the benefits obtained from the superior replacements. The duty to mitigate is a duty of reasonableness — the innocent party is not required to take extraordinary or unreasonable steps.

Key Principles of Mitigation:

Principle	Explanation
The duty is one of reasonableness	The innocent party is not required to take unreasonable steps
The innocent party must not increase their loss	They must not act unreasonably to make the loss worse
Successful mitigation reduces the damages award	Credit must be given for benefits obtained through mitigation
The burden of proof is on the defendant	The defendant must prove that the claimant failed to mitigate

In Payzu Ltd v Saunders [1919], a seller wrongfully refused to deliver goods on credit but offered to sell for cash. The buyer refused and bought elsewhere at a higher price. The court held the buyer should have accepted the cash offer — they had failed to mitigate.

---

Liquidated Damages and Penalty Clauses

Contracting parties may include a clause specifying the amount of damages payable on breach. Such a clause may be either:

Type	Validity
Liquidated damages	A genuine pre-estimate of loss — enforceable
Penalty clause	A sum designed to punish or deter breach — unenforceable (the court will award actual damages instead)