Contract Compensation

Elements

1. Plaintiff has a cause of action in contract – namely, a breach of contract;
2. Defendent’s breach of contract has in fact injured or caused a loss to the plaintiff – causation;
3. The loss suffered by P is not too remote; and
4. P has not breached his or her ‘duty’ to mitigate unnecessary loss

• The onus is on the plaintiff to prove the first three elements.
• Generally, the plaintiff’s case or cause of action, including causation must be proven on the balance of probabilities; Sellars v Adelaide Petroleum NL
• The plaintiff is presumed to have taken reasonable steps towards mitigation. The burden is on D to show that P has failed to take reasonable steps towards avoiding unnecessary loss; Banco de Portugal v Waterlow

Step 1: Cause of actions

There is a primary right in contract that has been breached that gives rise to a secondary right subject to satisfying the required elements.

There is only one cause of action = a breach of contract.

Step 2: Damages

“Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed” ; Robinson v Harman per Parke B.

Step 3: Causation

1. The ‘but for’ or causa sine qua non test; and
2. The ‘common sense’ test.
3. Novus Actus Interveniens?
4. Contributory Negligence?
5. Mitigation
6. Assessment 

• The plaintiff must prove that the defendant caused the breach which resulted in the claimed damage in order to recover loss.
• The test should be determined by reference to the ‘common sense approach’ with the ‘but for’ test being used as the threshold criteria test: March v E & MH Stramare Pty Ltd (1991) 171 CLR 506, 533; Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310.

“But for” test is inadequate when considering multiple causes or intervening events and is not the exclusive test; March v E M H Stramare.

• HC accepted common sense based analysis of causation; March v E M Stramare.
• P will not receive the full amount claimed in damages where P is guilty of contributory negligence or where there is a new intervening act (novus actus interveniens [ NAI])

1. But for Test

The ‘but for’ test asks the question but for the defendant’s tortious act would the plaintiff’s loss not have occurred?   If the answer is yes then causation is said to have been established: March v Stramare

The role of the ‘but for’ test is really a threshold criteria.   If the ‘but for’ test produces a negative response then normally there will be no causation but an affirmative answer does not mean that causation is always established.

It is a mistake to read this Court’s cautionary words about the ‘but for’ test as an expulsion of that notion from consideration where the question of causation is in contest.  On the contrary, a sufficient causal connection will, generally speaking, be established if it appears that the plaintiff would not have suffered the damage complained of but for the defendant’s breach of duty: Chappel v Hart (1998)

2. Common Sense Test

The test which is to be applied is that of the ‘common sense’ test.   This means that the tribunal of fact must assess all the surrounding circumstances and make a value judgement as to the cause of the plaintiff’s loss: March v Stramare

3. Novus Actus Interveniens? (part of ‘but for’)

Consider whether the breach ‘materially caused or contributed to the harm suffered’: Chappel v Hart

It must be so causally important that ‘it can be treated in a practical sense as the sole cause of the damage’: Alexander v Cambridge Credit Corp Ltd

Concurrent causes – consider whether the first breach has been ‘disarmed of its harmful potentiality’: Ibid 583 (Stephen J).

The issue of intervening events breaking the chain of causation between the defendant’s breach of contract and the plaintiff’s loss was considered by the NSWCA in Alexander v Cambridge Credit Corp;

• In order to establish a causal connection between a breach of contract and the damage suffered, the plaintiff only needs to show that the breach was a cause of the loss; it need not be the exclusive cause, it need only have ‘causally contributed’ to the loss.
• Where a number of factors combined to produce the loss or damage, the “but for” test is only a guide.
  • Ultimate question is whether as a matter of common sense, the relevant act or omission was a cause.
  • A later event may be so potent so as to overwhelm the original wrong. In this case the economic change did overwhelm the auditor’s breach.
    

4. Contributory Negligence? (part of the ‘but for’ test)

Lexmead Ltd v Lewis [1982] – HCA held that this would breach the chain of causation and would reduce damages.

Astley v Austrust Ltd (1999)– HCA said contributory negligence only applies to torts so a plaintiff who was aware of defect could sue in contract for 100% of loss.

The law permits the reduction of damages for contributory negligence whether an action is framed in contract or tort.

If a person can sue for both contract and torts, contributory negligence can be used.

If there is only liability in contract, then Astley v Austrust still applies.

If D breaches a contractual and tortuous duty of care owed to P (as is common in profession negligence cases), and P is guilty of contributory negligence, the court will reduce P’s damages in both tort and contract “to such an extent as the court thinks just and equitable”.

Step 4: Remoteness

Remoteness limits liability for loss which the defendant has caused.

The crucial question is whether, on the information available to the defendant when the contract is made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

C Czarnikow Ltd v Koufos [1969]  1 AC 350, 385.

Damage caused by D’s breach must not be too remote in law. Classic test was stated by Baron Alderson in Hadley v Baxendale;

“where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e according to the usual course of things, from such breach of the contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties, at the time they made the contract, as the probably result of the breach of it”.

• Although treated as a single principle there are two limbs; Jackson v Royal Bank of Scotland

First Limb

Where loss arises “naturally” in the usual course of things “as the probably result of breach”.

• D is prima facie liable for such loss, often characterized as “direct” losses. The resulting damage is presumed (by fact) to have been within the contemplation of the parties. P need not adduce evidence that D was aware of the risk of damages.
• Defining ‘natural’ losses is not easy – two possible tests arise;

1. P is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as likely to result from the breach. In contract the question is addressed to the time when the parties made their contract; Jackson v Royal Bank of Scotland – Lord Hope
2. Whether on the information available to D when the contract was made would he or a reasonable man have realized that such loss was sufficiently likely to result from the breach to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation; Jackson – Lord Walker (in contrast)

• In determining whether something arises naturally the court considers the actual and imputed knowledge of the party in breach so that every person is taken to know what losses arise in the ordinary course. NATURAL/NORMAL PROFITS.
• test is one of ‘contemplation’, ‘on the cards’, ‘serious possibility’ or ‘not unlikely result’: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, [60] (Gummow J).

Second Limb

Where the loss is of an unusual type, or “indirect” losses.

• P must prove that D knew or ought to have known that such loss would be “the probable result of the breach”.
• There is no presumption. Evidence must be adduced showing that the unusual damage or indirect loss was in fact contemplated by both parties at the time the contract was made; Jackson v Royal Bank of Scotland.
  • Merely to show knowledge on the part of D is insufficient;
  • There must be an undertaking to bear the unusual loss. It need not be a term in the contract; C Czarnikow v Koufos. An oral undertaking may be sufficient; Wright v Langlands Foundary.
    • g. International Transport v Densil Underwear

Facts: D made it clear that goods were to arrive in Nigeria in time for Christmas. P delayed in sending goods and did not arrive until 21 Dec. P was held liable for increased losses arising from the fact that the goods could not be sold at higher prices prevailing during Dec.

• The defendant must possess actual knowledge of the special circumstances which would flow from a breach. SUPER/ABNORMAL PROFITS.
• Requires  (a) actual knowledge of the special profit that could be made and

(b) the plaintiff must prove the defendant foresaw that increased loss was liable to occur following a breach.

Step 5: Mitigation

The plaintiff bears a duty to act reasonably in mitigating its loss:  Shindler v Northern Raincoat Co Ltd [1960]

P has a duty of taking all reasonable steps to mitigate the loss consequent on the breach and is not entitled to recover from D any damage which the exercise of reasonable care on P would have prevented from arising; British Westinghouse v Underground Electric; Hallell v Bagot.

Step 6: Assessment

Date of Assessment

Generally, the date of assessment is the date of the breach.  The Court may be flexible if the altering of this date would best protect the innocent party:  Johnson v Perez (1989)

• Traditionally, damages in contract are given on one lump sum occasion where defendant is completely discharged of liability.
• There are 3 exceptions:

1. Instalment contracts – Where contract calls for the payment of instalments, each instalment may constitute a separate cause of action.
2. Continuous contracts – Each breach of contract will give rise to separate cause of action.
3. Statute – When a series of payments is specified in an Act, for example monthly payments (such as in cases involving personal injury).

Contractual Damages

• Expectation damages – represent the loss of profit expected to be derived from the contract.
• Reliance damages – costs the plaintiff threw away by relying on contract: McRae v Commonwealth Disposals Commission (1951) 84 CLR 377.
• Loss of opportunity – whether social or commercial.
• Gratuitous benefits – where implied into a contract.
• Mental distress – for contracts of relaxation.
• Physical injury – stemming from unsafe goods.
• Injured feelings & loss of reputation – theoretically possible
• Exemplary damages – are not available for a breach of contract: Gray v Motor Accident Commission (1998) 196 CLR 1.