BetterLawNotes-5 (2)

CONTRACT LAW

The purpose of an award of expectation damages is famously set out by Parke B in Robinson v Harman (1848) 1 Ex 850, 855:

‘The rule of the common law is, that 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.’

The key phrase from Parke B’s dictum is ‘the same situation . . . as if the contract had been performed’. For, expectation damages are intended to give the claimant the ‘benefit of his bargain’ by putting him in the position in which he would have been had the contract been performed and not breached. In short, the task of the court ‘is to compare and contrast what was promised and what was received’.

To work out C’s expectation loss, we need to compare:

(i) C’s actual position

with

(ii) the position C would have been in had the contract been performed.

ILLUSTRATING EXPECTATION LOSS
Illustration 1

Suppose that C buys a painting from D for £9,000. It is a term of the contract that the painting is by X, a famous artist. In fact, it is a forgery. Had it been painted by X, it would be worth £10,000. It is actually worth £500. What is C’s expectation loss?

To work out C’s expectation loss, we need to compare:

(i) C’s actual position

with

(ii) the position C would have been in had the contract been performed.

Here, C’s actual position is that she has a painting worth £500.

C’s position had the contract been performed is that she would have had a painting by X worth £10,000.

It follows that C’s loss is £9,500, that is £10,000 less £500.

To confirm our answer, we can do a quick and simple cross-check: if the contract had been performed, C would have made a profit of £1,000. As it is, she has spent £9,000 on something worth £500. She has made a loss of £8,500. Her damages are £9,500, (ie, the sum necessary to take her from (- £8,500) to (+ £1,000).

Illustration 2

Suppose that C agrees to buy a painting from D for £9,000. It is a term of the contract that the painting is by X, a famous artist. Before paying the agreed price, C discovers the painting is a forgery. Had it been painted by X, it would be worth £10,000. It is actually worth £500. What is C’s expectation loss?

To work out C’s expectation loss, we need to compare:

(i) C’s actual position

with

(ii) the position C would have been in had the contract been performed.

Here, C’s actual position is that she C has spent nothing and has no painting.

C’s position had the contract been performed is that she would have spent £9,000 on a painting worth £10,000.

It follows that C’s loss is £1,000, that is £10,000 less £9,000.

To confirm our answer, we can do a quick and simple cross-check: if the contract had been performed, C would have made a profit of £1,000. As it is, C has made neither a loss nor a profit. C’s damages are £1,000, ie, the sum necessary to take her from £0 to £1,000.

Working Out C’s Position had the Contract been Performed

In establishing the position C would have been had the contract been performed, it is important to focus on what, precisely, the defendant had promised to do.

Consider the facts of Ford v White.

Ford v White [1964] 1 WLR 885

The claimants paid £6,350 for a house and an adjacent piece of land which they had intended to develop. However, the claimants’ solicitors, the defendants, had negligently failed to advise the claimants that the land was subject to a restriction against development. The evidence indicated that the property was worth £6,350 but that it would have been worth an additional £1,250 without the restriction. In their action for breach of contract against the defendants, the claimants claimed as damages this sum of £1,250. The court held that the claimants had actually suffered no loss and were entitled only to nominal damages.

To establish the position in which the claimant would have been had the contract been performed, it is necessary to identify the relevant term which was broken. The solicitor had not made any promise that the property could be developed, nor that it be worth any particular amount. What he had promised to do was to exercise reasonable care and skill in investigating whether the property was subject to any restrictions.

Had he kept his promise and exercised reasonable care and skill, he would have discovered the restriction and told the claimants about it. Had the claimants been told of the restriction they would have pulled out of the purchase, ie had the contract been performed, the claimants would not have ended up owning a property worth £7,600. Thus, an award of £1,250 would not have the effect of putting the claimants into the position they would have been in had the contract been performed.

Damages were nominal because the claimants suffered no actual loss. They were not out of pocket as the property was worth what they paid for it.

Having established what D promised, care must then be taken to identify accurately the position C would have been in had this promise been performed.

Consider the facts of Watts v Morrow.

Watts v Morrow [1991] 4 All ER 937

Relying on the defendant’s survey, the claimant bought a property for £177,500. The defendant’s survey had negligently failed to identify substantial defects in the property which the claimant then spent £34,000 remedying. The house’s market value at the time of purchase was found to be £162,500. The judge awarded damages of £34,000. The Court of Appeal held that the judge had been wrong to award damages based on the cost of repairs. The proper sum to award was £15,000

In Watts v Morrow, unlike Ford v White, C was out of pocket/worse off. Had D performed with reasonable care & skill, he would have alerted C to the true state of the property. C would then either have:

(a) pulled out – ie not bought it. In which case would still have £177,500 in his bank account. Instead he has an asset worth £162,500. Hence C is £15,000 worse off than he would have been had D performed with reasonable care and skill; or

(b) negotiated a reduced price. In the absence of evidence to the contrary, the presumption is that seller would have been prepared to sell at market value, ie £162,500. Hence C paid £15,000 more than he would have done had D performed with reasonable care and skill.

Note that there was no promise by D as to the true state of the house. D did not promise that there were no defects other than those in his report. The relevant promise was to exercise reasonable care & skill.

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