Key takeaway

Once a breach of contract has occurred, damages are only one possible remedy. Depending on the circumstances, the claimant may seek compensation, specific performance, an injunction, declaratory relief, rectification or, where the breach is sufficiently serious, termination. The appropriate remedy depends not only on what has gone wrong, but on the commercial outcome sought.

Contracts are promises the law will enforce. When one party fails to perform by failing to deliver goods, providing deficient services, or attempting to escape obligations, the immediate question is often whether there has been a breach.

But once breach is established, a different question follows: what remedies are available, and which is most appropriate in the circumstances?

English law offers a substantial range of remedies, and the most obvious is not always the most effective. The appropriate response may be to recover financial loss, compel performance, stop further harmful conduct, establish the parties' rights, correct the written agreement or bring the relationship to an end.

For an overview of the different types of breach and when a breach may justify termination, see our article on breach of contract claims, types of breach and remedies.

What damages can you claim for breach of contract?

Before considering the different remedies available, it is useful to set out the principle underlying almost every claim for contractual damages.

In Robinson v Harman (1848), the court held that a party who suffers loss through a breach of contract is entitled “to be placed in the same situation, with respect to damages, as if the contract had been performed.”

That statement, now well over a century and a half old, continues to do most of the analytical work in modern contract disputes.

In practice, the court compares the claimant's actual position with the position it would have occupied had the contract been performed.

Damages are compensatory, not punitive: they are awarded to compensate the claimant for loss caused by the breach, rather than simply to punish the party in breach or strip it of any profit it has made, subject to limited exceptions.

The comparison is harder where loss depends on what might have happened. Mathematical precision is not required: as the Court of Appeal held in Parabola Investments Ltd v Browallia Cal Ltd, the law “does not require a claimant to perform the impossible”.

In a disrupted business, the court may therefore need to consider lost profits, diminished value, additional management costs and lost goodwill.

What are the main types of damages for breach of contract?

Damages for breach of contract generally fall into three categories.

Pecuniary loss. Financial loss in the ordinary sense: the sum by which the claimant is out of pocket as a result of the breach.

Loss that is not pecuniary in nature. Loss that is not purely financial but remains compensable, such as certain forms of distress or inconvenience recognised by the courts in appropriate cases.

Nominal damages. A breach of contract is actionable without proof of loss, which means that a claimant unable to point to any real financial loss remains, in principle, entitled to a token award recognising that a legal right has been infringed.

Nominal awards achieve little, and even a nominal claim must justify the resources it consumes. In Jameel v Dow Jones and Company Inc, the court asked whether “the game is worth the candle”; the same proportionality concern can arise where the value of a contract claim is negligible compared with the costs of pursuing it.

These are unliquidated damages, assessed by the court.

They are distinct from liquidated damages, where the parties have themselves fixed the amount payable for a particular type of breach in advance.

Where a contract fixes the financial consequence of breach, it is also important to consider whether the provision could amount to an unenforceable penalty. See our article on penalty clauses in commercial contracts and when compensation becomes unenforceable.

How are damages for breach of contract calculated?

One of the more practically significant questions in any claim for damages, particularly in construction and property disputes, concerns how the loss should be measured.

Two competing approaches may arise.

The cost of cure measure awards the claimant the reasonable cost of putting matters right or obtaining the promised performance from somebody else.

The diminution in value measure instead compensates the claimant for the reduction in the value of what it received as a result of the breach.

Cost of cure may be appropriate where remedial work is reasonable and genuinely required, but it can be displaced where cure is impossible, the claimant does not intend to undertake it, or the expense would be wholly disproportionate to the claimant's legitimate interest in performance.

In Ruxley Electronics and Construction Ltd v Forsyth, a swimming pool was nine inches shallower than the contracted seven feet six inches.

Rebuilding would have cost more than £20,000. Because the shortfall did not reduce the pool’s value and the owner did not intend to rebuild, the House of Lords awarded £2,500 for loss of amenity rather than the cost of cure.

The case illustrates an important point: contractual damages are intended to compensate for the loss actually suffered, not automatically to fund the most expensive possible method of correcting the breach.

Can you claim interest on breach of contract damages?

Interest should be considered and pleaded properly from the outset. The court has discretion to award simple interest on damages for the period between the cause of action and judgment, or earlier payment.

An award is not automatic. The court may shorten the relevant period, alter the rate or withhold interest depending on the circumstances.

Where a dispute has continued for a significant period, interest can nevertheless become a material part of the overall claim.

How do exclusion and limitation clauses affect breach of contract claims?

The fact that loss has been suffered does not necessarily mean all of it can be recovered. Commercial contracts frequently exclude particular categories of loss, place financial caps on liability or impose procedural conditions on claims.

Before pursuing damages, the parties should consider:

• whether the limitation or exclusion clause was properly incorporated;
• what losses the wording actually covers;
• whether any contractual cap has been reached;
• whether notice or time-bar provisions apply; and
• whether statutory controls, including the Unfair Contract Terms Act 1977, affect enforceability.

A limitation clause can materially reduce an otherwise substantial claim and should therefore be analysed at the beginning of a dispute rather than after significant costs have already been incurred.

What equitable remedies are available for breach of contract?

Not every contract dispute is really about money.

Sometimes the claimant wants the promised obligation performed, particular conduct stopped, a disputed right clarified or the written contract corrected.

That is where equitable and declaratory remedies become important.

Specific performance

Specific performance requires the party in breach to carry out the contractual obligation itself.

It is particularly relevant where damages would not provide an adequate substitute, for example in certain property transactions or share transfers where the claimant wants the specific asset rather than its monetary equivalent.

Injunctions

An injunction can require a party to do something or prevent it from doing something. Depending on the circumstances, an injunction may be interim or final, and mandatory or prohibitory.

It can be particularly valuable where harmful conduct is continuing and damages awarded months or years later would not adequately protect the claimant's position.

Declaratory relief

A declaration allows the court to determine the parties' legal rights or the meaning of a contractual provision without necessarily requiring an accompanying damages claim. This can be commercially useful where the parties need clarity about the agreement before the relationship deteriorates further.

Rectification

Rectification allows the written contract to be corrected where the document does not accurately record the parties' actual agreement. The remedy is therefore fundamentally different from interpreting ambiguous wording: the argument is that the document itself fails properly to record the bargain the parties reached.

When can a contract be terminated for breach?

Termination is different from a claim for damages because it brings future contractual obligations to an end. It can be an extremely valuable remedy, but it must be approached carefully. An incorrect attempt to terminate can itself amount to a serious breach.

Whether a breach gives rise to a common law right to terminate depends partly on the nature of the term that has been broken.

Conditions are sufficiently important that breach ordinarily permits termination as well as damages.

Warranties are less fundamental and generally give rise to damages only.

Intermediate or innominate terms cannot be classified so simply. Under Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, the question is whether the consequences of the particular breach are sufficiently serious to justify termination.

A sufficiently serious breach may amount to a repudiatory breach, allowing the claimant to accept the repudiation, bring the contract to an end and claim damages for the loss of the bargain.

For more on the distinction between contractual and common law termination rights, see our article on terminating a contract and what businesses need to know.

What happens if a contract is terminated without the right to do so?

This is one of the most significant risks in a contractual dispute.

Terminating on the mistaken belief that a right exists may itself amount to a repudiatory breach.

If the original breach is later held not to have justified termination, the party that attempted to terminate may find itself treated as the defaulting party and exposed to a damages claim.

In practice, one party may serve a termination notice alleging serious non-performance while the other responds by asserting that the notice itself amounts to repudiation. The court may then need to determine which party was actually entitled to bring the relationship to an end.

Before terminating, a party should therefore establish:

• whether the relevant contractual or common law right exists;
• whether any contractual threshold for termination has been met;
• whether notice requirements have been followed precisely; and
• what financial consequences follow from the particular route to termination.

Recent Supreme Court authority also demonstrates that the damages available following termination can depend on the wording surrounding the termination right itself. See our article on termination clauses and loss of bargain damages in The Lila Lisbon.

Acting quickly to terminate before the other side does may sometimes appear commercially attractive. Doing so without a secure legal basis can materially worsen the position.

Which remedy is appropriate for a breach of contract?

Before pursuing a claim, the party affected by the breach should identify the commercial outcome it is seeking.

Is the objective to recover money already lost? To obtain the promised performance? To stop ongoing conduct? To establish the meaning of the contract? To preserve the relationship? Or to make a clean exit?

That answer may determine which remedy is most valuable.

A party should also consider the financial position of the defendant, any contractual limitations on recovery, the cost and proportionality of proceedings, the availability of interim relief and the risks associated with termination.

The strongest legal claim is not necessarily the remedy that produces the best commercial outcome.

Barnes Law’s Commercial Litigation and Dispute Resolution team advises businesses and individuals on breach of contract claims, contractual damages, injunctions, termination and other commercial remedies. For more information, please contact our Commercial Litigation and Dispute Resolution solicitors to discuss how we can support you.

Written by Barnes Law Managing Partner Yulia Barnes.