Damages to compensate a party for breach of contract fall into two types: 'expectation' or 'reliance' damages.
'Expectation' damages are intended to put the wronged party in the position it would have been in if the contract had been fulfilled as intended. This is the normal measure for assessing damages for breach of contract. Expectation damages can be measured in four ways:
- cost of rectification;
- difference in value between the actual and expected performance;
- difference in cost to the contractor between actual and expected performance;
- loss of amenity.
'Reliance' losses are also known as wasted expenditure. If the party who is not in breach has good reason not to pursue damages for expectation loss it may be able to recover damages to put it in the position it would have been in if the contract had never been performed. Reliance damages are intended to compensate the innocent party for expenses incurred and losses suffered in reliance on the contract. The object is to put the innocent party in the same position it would have occupied had the contract never been made. Expectation loss and reliance loss are mutually exclusive to prevent double recovery.
The appropriate measure of damages for incomplete or defective works is that which reflects the true nature of the wronged party's loss. However, this is also subject to a requirement of 'reasonableness' – if it would be unreasonable for the wronged party to insist on the contract being fulfilled as intended, it can only claim for the difference in value.
An important case in this area happened in 1996. A contractor, Ruxley Electronics, was meant to build a seven foot six inch deep swimming pool, but the finished pool was only six foot deep. The cost of a new pool would have been £21,560 but the employer, Mr Forsyth, never had any intention of using the damages to correct the fault. The House of Lords upheld an alternative award for £2,500 of 'loss of amenity'. Lord Lloyd said that, although what Forsyth intended to do with the money was irrelevant after the extent of his loss had been established, it was certainly relevant in determining the appropriate measure of that loss.
Reliance on professional advice
If a contractor is in breach of contract it is usually because of defects, which mean that the contractor has failed to perform in accordance with the contract. In this case the employer may have a dilemma in considering what remedial work should be undertaken. This was the situation facing Linklaters Business Services (LBS) in its 2010 case against building contractor McAlpine.
McAlpine had built a city headquarters for LBS, and had subcontracted for the installation of an air conditioning system. In 2006 a leak was identified, and it was discovered that the pipes were seriously corroded. LBS' consultants advised that the pipework should be stripped out and fully replaced.
At the trial McAlpine argued that it was not reasonable or necessary to have fully replaced the pipework - some lesser remedial scheme involving a combination of replacement and repair would have been more appropriate. However, the judges held that the decision to replace the pipework fully was reasonable, particularly as the firm had taken professional advice before demanding that remedy.
Reliance on non-negligent advice is not on its own enough to establish an entitlement to full costs, but will be a material factor which the court will take into account.
Reasonableness in the valuation of claims
Overstating the value of a claim can have two potential consequences:
- adverse costs awards;
- loss of credibility.
Adverse costs awards: courts have discretion to award costs to either party. Under the Civil Procedure Rules (CPR), the courts should take into consideration 'all the circumstances, including the conduct of the parties' when making an award. 'Conduct' specifically includes whether a claimant has exaggerated its claim.
The court can do two things in these circumstances:
- deprive a successful claiming party of its costs;
- award the defending party its costs, assessed on an indemnity basis.
Damaging credibility: attempting to claim for spurious categories of loss will damage the credibility of the claiming party but also of its witnesses, whether expert or factual.
Loss of credibility can:
- lead the court to take a cautious approach to even genuine or arguable items of loss;
- undermine the claiming party's arguments about the defending party's liability.