Contractual Damages Prepared by Saraswathy Shirke Deo Table of - - PowerPoint PPT Presentation

Prepared by

Saraswathy Shirke Deo

Principles & Challenges in Handling

Contractual Damages

Table of Contents

Measure of Contractual Damages Quantum Meruit Calculating Expectation Loss

When Cannot be forecasted – Assessing Actual Loss

Policy Considerations & Recent Developments

MEASURE OF CONTRACTUAL DAMAGES

Expectation damages

compensate the innocent party for the value of some benefit he would have received under a contract, had it been properly performed. The measure is the net value of the benefit the innocent party failed to get.

Reliance damages

by contrast, compensate for losses suffered by the innocent party through having relied on performance by the

• ther party and then

having been

• disappointed. It

generally involves claims for wasted expenditure. Consequential damages include any other losses such as loss

• f profits or income,

resulting as a consequence of the

• ther party's breach;

in so far as they are not too remote. These may include loss of prospective profits; personal injury, damage to property, and liability to 3rd parties.

Expectation Loss

 It is the normal measure for

assessing damages for breach of contract

 Based on the plaintiff's

expectation of receiving the

defendant's performance

 expectation loss & reliance loss are

mutually exclusive, so as to prevent

double recovery

Reliance Loss

• Losses suffered having relied on

performance by the other party

• Generally involve claims for wasted

expenditure

• Only where it is impossible to

calculate or cannot establish

what profits he would have received, had the contract been performed

• But cannot be placed in a better

position than he would have been in,

had the contract been performed

Consequential Loss

• This is claimed as Special Damages.
• Any other losses which may have resulted as a

consequence of the defendant’s breach

• Consequential damages are foreseeable

damages that arise as a result of the breach, from circumstances outside a contract which the parties ‘knew’ when the contract was made.

• Must not be too remote. To be liable for

consequential damages, the defendant must know or have reason to know that the breach will cause special damages to the plaintiff.

• The damage must be such that it ‘arose in the

usual course of things’ or ‘which the parties knew, when they made the contract, to be likely to result from the breach.

What is Restitution?

 An alternative to damages where no

no los

• ss can be

be pr proved by the breach of

the defendant. This form of restitution is a combination of quantum meruit and quasi contract under common law, together with the equitable remedy of unjust enrichment.

 In contrast to expectation and reliance losses, re

resti titu tuti tion; is calculated based

• n the gains of
• f the

he de defendant resulting from the breach of contract,

rather than the plaintiff's losses.

 To restore the innocent party to the pos

position he he ha had be before the he for

• rmation of
• f the contr

trac

• act. Parties claiming restitution cannot seek lost

profits or earnings caused by the breach. Also, restitution will not be awarded if the amount cannot be calculated with certainty.

 A plaintiff cannot be

be awarded in the restitution claim, an amount greate ter than han the he los

• ss or
• r dam

damage ge that he has suffered as a result of the

breach.

What is Quantum Meruit ?

‘as much as merited’ or ‘as much as is earned’

a claim in proportion to the work done or goods supplied

When will it be employed to assess damages?

• when no price is fixed (thus, if the contractor does work under a contract and no

price is fixed by the contract, the contractor is entitled to be paid a

reasonable sum for his labour and the materials supplied);

• in a quasi-contract situation (a good example would be when work is carried
• ut while negotiations as to the terms of the contract are ongoing, the

contractor is entitled to be paid a reasonable sum for the work carried out);

• when work is performed outside a contract (thus, in a situation where there is a

contract for specified work but the contractor does work outside the

contract at the employer's request the contractor is entitled to be paid a

reasonable sum for the work outside the contract on the basis of an implied contract).

Spatial Ventures Sdn Bhd v Twintech Holdings Sdn Bhd [2013] 1 LNS 729 refd(9)

Nallini Pathmanathan J (as her ladyship then was)

• An assessment for restitution on the basis of quantum meruit is in

reality measure of the costs of the work done,

• It does not depend upon the contract and therefore will not be

trammelled or limited by the contract rate.

• This gives the plaintiff, not contractual damages, but restitution

for the work done.

• To assess on a quantum meruit basis, the court has to consider the

following issues in assessing work done based on proof:

• i. what as a matter of fact is the work done; and
• ii. how is the work done to be measured.

Note: Work done is quantified & a value is then placed on it to determine the

• quantum. Plaintiff must tender evidence to enable the court to arrive at an

assessment of the value of the work done.

At Common Law

Hadley v Baxendale (1854) 9 Ex 341 “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive … 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 contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”

Contracts Act 1950

Section 74 (1) When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. (2) such compensation is not to be given for any remote and indirect loss

• r damage sustained by reason of

the breach.

Assessment of Damages

GENERAL & SPECIAL DAMAGES

In Ban Chuan Trading Co Sdn Bhd v Ng Bak Guan [2003] 4 CLJ 785, the COA considered recovery of general and special damages under section 74. Following the FC decision in Ismail v Haji Taib [1972] 1 LNS 47 foll(2) refd(4), it was observed that the P could exercise his option to claim for:

• General Damages (Loss of Profits); or

1st Limb (directly & naturally resulting from the breach)

• Special Damages (Wasted Expenditure or

2nd Limb the Damages incurred in Preparation of Performance. Loss of Profits known to contract breaker) The P could not recover damages under both heads, though he may plead them in the alternative.

CALCULATING Loss of Pr Profits its

Let’s consider the case of - Delpuri-Harl Corp JV Sdn Bhd v Perbadanan Kemajuan Negeri Selangor [2014] 1 LNS 1075

ACTS

Delpuri- Harl

The crux of the decision was premised on the issue of whether the respondent was entitled to claim for the:

• loss of profits in the sum of RM12,520,000; and
• wasted expenditure in the sum of RM2,563,878.95.

whether the appellant's method of assessment to claim for the loss of profits was proper

whether the appellant is entitled to claim for wasted expenditure in the sum of RM2,563,878.95 whether the appellant's claim should be based on quantum meruit as estimated by R’s QS

elpuri Harl

elpuri Harl

Calculating Loss of Profits

The A’s method of assessing loss of profits: [deduct the cost of subcontract from the cost of main contract] RM41.3 mil – RM28.8 mil = RM12.5 mil

 The court rejected because the A did not prove that a profit at 30.26 per centum for a contract of this nature was usual or normal in the construction industry.

The COA considered the ordinary measure of assessing loss of profits: Remaining Contract Estimated Cost Price

• f Completing

the Job RM41.3 mil -- ? No Estimate = Loss Of Profits Not Proved

 No evidence was adduced to prove estimated cost of completion. COA only awarded RM100K which sum included the sum of RM70,575.45 assessed by QS which represents value for work done, as nominal damages to the A.

Delpuri-Harl Corp JV Sdn Bhd v Perbadanan Kemajuan Negeri Selangor [2014] 1 LNS 1075

DECISION OF THE HIGH COURT: After a full trial the learned High Court judge held that the termination of the contract was a mutual termination and that, save for the award of the sum of RM70,575.45 being a sum admitted by the respondent, the rest of the appellant's claim was dismissed with costs. COURT OF APPEAL: reversed High Court’s decision on liability & held that the termination was made unilaterally by the respondent & accordingly it was a wrongful termination. On quantum - held that the appellant had failed to prove its losses as claimed. COA instead awarded RM100K

• nly as nominal damages.

* “ …In doing so, we recognised the fact that the appellant did suffer some damages as a result of the wrongful termination.”

Calculating Loss of Profits based on ‘Market Price Differential' scheme where there is an 'available market‘

This is provided by s. 74(1) of the Contracts Act 1950: 74(1) When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby which naturally arose in the usual course of things from the breach,

• r which the parties knew, when they made the contract, to be likely to result from the

breach of it. Illustrations to s.74, namely (c), (d) & (o) indicate the application of market price differential method to measure the recoverable damages.

• Scandinavian Bunkering (S’pore) Pte Ltd V MISC Bhd [2015] 3 CLJ 291
• Malaysian Rubber Development Corp Bhd v Glove Seal Sdn Bhd [1994] 4 CLJ 267

For example: A buyer breaches the contract by failing to accept goods delivered. The seller's damages are calculated by deducting the contract price from the market price at the time and place fixed by the contract for acceptance of delivery of goods.

…and its impact on assessm ssment of contrac actual ual damages

• Polic

licy Consi siderat ation

• ns

s

• The Tempor
• rary

ary Measure sures s for Reduci ucing the Impac act

• f Coronavirus

avirus Disea sease se 2019 9 (COVID OVID-19) 9) Act 2020 is intended to suspe spend, for a speci cifi fied period

• d,

enforce rcement of contrac actual al obligati ations s agai ainst st a defaul aulting party, who

• is usual

ually ly the weake aker r party rty & does s not have ve an equal bargai rgaining g stre rengt gth with the other r contract ractual ual party.

ALLOCATIO ION OF RISKS WHAT WAS WITHIN THE CONTEMPLATION OF THE PARTIES? ASSU SUMP MPTIO ION OF RISKS

The courts would consider the balance of convenience

The impa

pact ct of COVID VID-19 19

complications are likely to be greate test st in claims for lost

t prof

• fit

its s (Exp xpecta ctatio tion Loss ss) than in

claims for waste

sted d expendi nditur ture (Relian ance ce loss).

Where the expectation loss cannot be accurately measured than other measure such as reliance nce loss or quant ntum m meruit it .

The ‘Market Price Differential’ method cannot be used as measure of damages:

▸Where there is no available market (due to MCO

• r Covid-19 complications)

▸Where there is an available market but the actual

loss arising from the breach would change continually as restrictions on businesses and lockdowns were tightened or eased, making it very difficult to predict or calculate loss

“ ”

The question for decision is as to the correct measure of damages … at the date of the termination of the charter, no market for the unexpired period and a market for then the unexpired period only revives at a much later

• date. …damages are to be assessed by

reference to the actual loss of the owner.

per Blair J Glory Wealth Shipping Pte. Ltd. v Korea Line Corporation [2011] EWHC 1819

Actual loss

If supplier failed to deliver goods; but the innocent party’s business was in fact closed due to lockdown then there is no actual loss until the business was re-

• pened.

No Available Market

• The fundamental principle governing the quantum of

damages for breach of contract is that damages should compensat sate the plaintiff tiff for the loss s of his contrac actua tual l bargain ain.

• The object of an award of damages is to put the plaintiff, as

far as money can do, in the position tion he would d have been in if the contract had been performed.

• The market price on an available market at the date of

breach is deemed by the law to represent t reasonab able le mitig igat ation ion.

• But if there is no available market at the date of termination,

then one has to fall back on the broader question of asking what sum would put the plaintiff tiff in the same financia ial l position tion which he would have been in had the contrac act t been performe med, by making a comparison between his "lost" and actual financial positions.

‘actual’

what actually happened in the business

Covid19 issues such as MCO, preventive measures, additional SOPs and the Covid19 Act are relevant considerations.

The assessment of future profits and cash flow may be forecasted based on the difference between ‘actual’ & ‘but for’ schema

‘but for’

what would have happened but for the breach

Based on the normal past trading scenarios, pre-Covid and post-Covid expectations estimate.

Lockdown & Shut down of Non- Essential Services by Govt. Increased Cost of Production (Additional Costs & SOPs) Oil Price Slump & Volatility of Currency Business-specific risk/losses – How a Particular Industry is Really Affected? Is it a Long Term or a Short Term Impact?

Factors

THANK YOU!