Catherine Naylor
Partner
Article
9
It makes sense to be aware of what is potentially recoverable before incurring the significant costs of pursuing a claim.
Here, we cover the basics you need to know on contractual damages including the basis of the calculation, mitigation, interest and practical steps to protect your position.
In this article, we focus on contractual damages.
It may be that there is a choice to claim damages on a different basis - in tort, as an alternative to, or in addition to contractual damages. Remember that the measure of damages in tort is different to the measure that applies for contractual damages - the tortious measure is not covered in this article.
Where liability is proven in contract and, and the breach of contract also amounts to a tort, the contractual measure of damages will apply.
Damages are what you will be entitled to recover in principle if you can prove your claim, unless you have agreed an applicable exclusion or limitation of liability in the contract.
Exclusion clauses can be agreed by the parties to a contract in order to limit or exclude contractual liability that would otherwise arise. We cover this in more detail in our article The Basics: Limiting and excluding liability for breach of contract.
Contractual damages are intended to compensate for the loss suffered i.e. generally, to put you in the position you would have been in, if there had been no breach of contract and the contract performed.
In order to be recoverable, the loss must be foreseeable at the date the contract was entered into (not the date of breach). Understanding the difference between direct and indirect losses will help you in negotiations, and also to assess potential exposures if a breach of contract occurs.
If they are foreseeable, both direct and indirect losses are recoverable in principle, but many contracts will seek to exclude liability for indirect or consequential losses, as referenced in our article on excluding liability.
In certain cases, negotiating damages (previously known as Wrotham Park damages) may be recoverable, being the amount the defendant would have paid (hypothetically) if, before any breach by the defendant, there had been a negotiation resulting in a payment to the claimant by the defendant in return for the release of the relevant obligations.
When negotiating damages will be recoverable is not entirely clear from the case law, but the Supreme Court has recently held that this approach will not usually be appropriate for breach of contract claims, where damages are usually based on actual loss. However, in principle, negotiating damages can be awarded for breach of contract "where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset".
Practically, this measure of damages will rarely apply.
A claimant or potential claimant should take reasonable steps to reduce any losses; in other words, to mitigate the loss.
As an example, if an employee is dismissed and starts a claim for unfair dismissal, he or she must take reasonable steps to find a new job as soon as possible, in order to reduce the loss potentially recoverable from the previous employer.
If a claimant fails to act reasonably in terms of mitigation, any damages award may be reduced to reflect the reduction of the loss that would have resulted if the claimant had taken reasonable steps to mitigate.
Continuing the example above, if the ex-employee has a suitable job offer but then delays the start date for two months in order to travel, (in the absence of exceptional circumstances) he/she will not be able to recover loss of income for those two months.
In most cases, yes but not automatically.
In many cases, if a contract does not provide a substantial remedy for late payment, then a statutory rate of interest will apply - where the Late Payment of Commercial Debts (Interest) Act 1998 applies, this is currently 8% over base rate.
In terms of recoverability, internal costs following a breach of contract generally fall into two separate categories.
These are good working practices from any perspective and they will certainly save you time and costs at a later stage if a claim arises.
If you have any queries on this or related topics, please contact Catherine Naylor.
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