i OVERVIEW

Under English law, the basic principle for breach of contract is that a party is entitled to be put in the same position as they would have been had they not sustained the wrong.2 As the name suggests, compensatory damages are intended to compensate a claimant for losses suffered as a result of the other party's (wrongful) conduct.

While the concept of compensatory damages is common to several jurisdictions, a distinctive feature of English law is the emphasis on mitigation of loss. The claimant is expected to take all reasonable steps to minimise its loss resulting from the defendant's breach of its obligations. Loss that could have been avoided through reasonable action or inaction by the claimant will not be recoverable. By corollary, if the injured party takes reasonable steps to minimise the loss incurred, the cost of these steps is recoverable and the damages owed by the defendant are reduced by the amount of the reduction of loss.3

There are three main categories of recoverable damages under English law: (1) expectation damages; (2) performance damages; and (3) reliance or 'wasted expenditures' damages. Other categories of damages include moral damages, punitive or exemplary damages and non-monetary damages such as specific performance,4 but this chapter's focus is on compensatory damages.

Expectation damages are awarded to put the claimant in the position it would have been in but for the breach. The ability of a claimant to recover lost profits will depend on the subject of the breach.5 There are two types of 'expectation damages': normal or direct damages (also known as general damages), and consequential damages (also known as special damages).6 Normal or general damages follow as a natural and probable consequence of a breach,7 whereas consequential damages are those that do not flow directly from the breach and are particular to the injured party and can therefore be difficult to calculate in financial terms.8

Performance damages compensate the cost of curing the defective performance9 and 'wasted expenditures' or 'reliance damages' compensate the losses or expenditures incurred by the claimant in reliance on the contract.10 These damages are aimed at putting the claimant in as good a position as he or she was in prior to the promise.11

II QUANTIFICATION OF FINANCIAL LOSS

In English law, the purpose of an award of damages for breach of contract is to compensate the injured party for loss, rather than to punish the wrongdoer. The general rule is that damages should (so far as a monetary award can) place the claimant in the same position as if the contract had been performed.12 Therefore, damages are usually measured by the difference in value between the contemplated and actual performance of the contract.13

To establish entitlement to damages, the claimant is also required to show that adequate steps have been taken to mitigate the damage resulting from the defendant's actions. Failure to take mitigating steps will likely result in the claimant's entitlement to damages being reduced.

In addition to mitigating factors, damages awarded under English law are also influenced by methods of calculation, application discount and interest rates and income tax or capital gains tax.

i Evidence

If a claimant has suffered a loss,14 there are four key elements that are relevant to establishing a party's entitlement to damages and determining the amount of damages to be awarded: (1) the existence of a wrong; (2) reasonable foreseeability; (3) failure to mitigate the impact of the breach; and (4) chain of causation.

The first and most basic requirement is that, to establish an entitlement to damages, one must prove the existence of a 'wrong'15 – that is, a breach of contract. Second, a claimant must establish that the damage is not too remote and that the losses were reasonably foreseeable at the time the parties entered into the contract.16 The test of reasonable foreseeability was first outlined in Hadley v. Baxendale as:

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 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.17

For loss to have been foreseen, it must have been contemplated by the parties and 'not unlikely'18 at the date of entering into the contract. Loss is said to have been in contemplation of the parties (and therefore assumed)19 if, objectively assessed, it could be said to occur in the ordinary course of events, or, if subjectively assessed, there are special circumstances or knowledge attributable to the parties.20

Third, any damages awarded are subject to deductions for any failure to mitigate (or contributory negligence in the case of breaches of duty of care). The defendant carries the burden of proof in relation to establishing the claimant's actions (or lack thereof) to mitigate damage as a result of the defendant's breach.21 Provided the steps taken by the claimant to minimise the loss incurred are reasonable, the cost of such steps is recoverable even if the steps taken have increased the loss.22 However, any profit accrued as a result of the claimant's mitigating actions is also credited to the defendant if causation is established, with the latter having the burden of proving the existence and amount of such profit.23

Fourth, any damages awarded are also subject to any breaks in the chain of causation.24 Irrespective of factual causation, English law can treat some losses as not having been legally caused by the breach, on the basis that it is not fair to hold the defendant responsible for them because of a 'break in the chain' or novus actus interveniens.25 If the breach of contract was the 'effective' or 'dominant' cause of the loss, damages may be recoverable even if the breach was not the sole cause of the loss.26 Where there are competing causes, a balance of probabilities test applies.27

ii Date of assessment

Under English law, damages are normally assessed at the date of breach of contract unless to do so would not be in the interests of justice.28

However, the date of breach may not be appropriate as the starting point for calculation of damages. For example, a claimant's steps to mitigate the loss may impact the evaluation of the damages. Similarly, where the claimant has not in fact suffered any loss at the date that the actual breach occurred, but only began to suffer loss subsequently, the latter date may be the more appropriate starting point for calculation.

iii Financial projections

Under English law, a claimant must prove the fact of loss and the amount of the loss on the balance of probabilities, that is, 'If the evidence shows a balance in favour of it having happened, then it is proved that it did in fact happen.'29 However, different principles apply for future or projected loss.

Where it is difficult to prove the amount of loss with certainty, the wrongdoer should not be relieved of his or her responsibility to pay.30 Damages can be recovered for 'loss of a chance'. However, this is an inherently uncertain head of loss, and can raise difficult issues of causation and quantification.31

The doctrine of 'loss of chance' was introduced in English law by the decision in Chaplin v. Hicks,32 but has since evolved considerably. In Mallett v. McMonagle, Lord Diplock opined:

Anything that is more probably than not [the court] treats as certain. But in assessing damages which depend on its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the changes that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages it awards.33

Establishing a loss of chance requires that there be both a real and a substantial chance – a chance that is negligible is not likely to support recovery of projected damages.34 Similarly, a chance to which only a speculative money value can be assigned is unlikely to succeed.35 However, where the realisation of a chance appears to be virtually certain, the court will consider it appropriate to award what would have been awarded against the defendant originally.36 The court recently held that where a claimant's recovery is dependent on the actions of a third party, then loss of chance principles must apply, rather than an assessment of the actions of the third party having taken place by reference to the balance of probabilities. If causation depends at least in part on the action of one or more third party, the claimant must demonstrate that there would have been a real or substantial chance that the third party would have acted in the respect relied upon by the claimant. 37

iv Liquidated damages and penalties

Parties to a contract can agree between them the amount of damages payable for any breaches (stipulating different sums for different breaches).38 The long-standing common law rule is that a term in a contract, which constitutes a penalty, is unenforceable. Therefore, the court will have to determine whether the payment stipulated is a liquidated damage or a penalty. A penalty is a payment of money stipulated as in terrorem of the offending party and the liquidated damages are a genuine pre-estimate of damage.39 The Supreme Court in the 2016 conjoined appeals in Cavendish Square Holdings v. Makdessi and ParkingEye Ltd v. Beavis40 revisited and reinstated the above law on penalties and liquidated damages.

The court held that the penalties doctrine is applicable only when there is a breach of contract and no matter how extreme a party is penalised, it will amount to a penalty only when it is a result of breach. The courts have no power to regulate parties' primary regulations and the rule is applicable only in the case of secondary obligations. In this judgment, Lords Neuberger and Sumption stated that 'the true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation'.41 The court further observed that whether a clause operates as a primary obligation or secondary obligation is a question of substance and not form.42 More recently, the court considered the application of liquidated damages clauses and reiterated the importance of the precise wording of the clause in determining its application.43

v Discount rates

The calculation of compensatory damages often involves the determination of future losses or 'loss of chance'. When calculating future losses, the application of an appropriate discount rate is required to estimate the expected rate of return had the loss not occurred.

In a consultation by the Ministry of Justice in relation to the Damages Act 1996, the overriding aim behind discount rates was described as to set the rate as accurately as possible so that under-compensation or over-compensation by reason of the accelerated payment of the future losses is avoided as far as possible.44

While this principle was articulated in the specific context of personal injury claims, the general presumption is helpful when considering the general application of discount rates to the calculation of compensatory damages. In the discounted cash flow analysis (discussed further below), if a breach of contract results in loss of profits over time, a discount rate is applied to estimate the current value of the cash flow. The discount rate in such instances would typically depend on the asset being valued. For example, while valuing equity, the relevant discount rate would be that most appropriately reflecting the cost of the equity. Discount rates are influenced by a variety of factors including political changes, future inflation, currency devaluation and fluctuating interest rates.

Experts use a variety of discount rate calculation methods when valuing assets including, for example, the capital asset pricing model (which considers a stock's rate of return, the market's rate of return and a risk-free rate) and the weighted average cost of capital (which is usually used to assess a company's value as a whole by estimating the weighted average of new debt and equity needed to operate the company).

vi Currency conversion

The currency contemplated by the contract generally determines the currency for damages to be awarded.45 Where the contract does not provide for a specific currency for the awarding of damages, the damages will be awarded in the currency in which the claimant suffered the loss.46

In Miliangos Respondent v. George Frank (Textiles) Ltd,47 the House of Lords found that the English courts had the authority to give judgment in foreign currency where under a contract, payment obligations are in a foreign currency and the proper law is that of the foreign country, with payment to be made outside the United Kingdom.48 The courts will take into account commercial considerations and give judgments in foreign currency or its sterling equivalent at the date when the court authorises the claimant to enforce the judgment.49 This protects the claimants against any decrease in the external value of sterling in relation to their own currency, save for in instances where the value of sterling is rising.50

The courts have also considered the issue of whether a court has the power to make a cost award to compensate for any exchange rate losses incurred in paying costs. In Elkamet Kunststofftechnik GmbH v. Saint-Gobain Glass France SA,51 the court held that 'order for costs is designed to compensate the successful party for its expenditure so that exchange rate losses can be compensated in the same way as it is entitled to be compensated by way of interest for being kept out of the money'.52

vii Interest on damages

The court has the authority to award interest on damages for any period between the date when the cause of action arose and the date of judgment.53 If the claimant caused unwarrantable delay, interest on damages for such period will be reduced accordingly. A damages claim (including a claim for interest) should therefore be clearly particularised and supported by the necessary written and oral evidence required to prove the claimant's case.

The court has the discretion to award interest at different rates in respect of different periods; in contractual claims, the interest rate should reflect the current commercial rate. The Commercial Court and the Court of Appeal generally award 1 per cent above the base rate. However, if such calculation would put either party in an unfair position (smaller business pays higher interest rate, etc.), the court can adopt an appropriate interest rate to suit the parties.54

Where the damages are calculated in a foreign currency, the commercial borrowing rate in the foreign currency in the relevant country is considered as the relevant interest rate.55

viii Costs

As a general principle, legal costs incurred as a result of breach of contract can be recovered as damages, where they were incurred in actions against third parties or previous actions against the defendant. The costs of the dispute over the breach of contract itself, although caused by the breach usually cannot be claimed as damages as they fall within the exclusive jurisdiction of the courts' costs regime.56

As a result of the mitigation principle, legal costs recoverable as contract damages are assessed in the same way as 'indemnity basis' of costs. That is, 'unreasonable' costs are not recoverable under common law principles, nor is proportionality always taken into account.57

ix Tax

There are two types of taxation that may apply in relation to an award for damages: income tax and capital gains tax.

Prior to 1956, the English courts did not reduce awards of damages to account for income tax. However, in British Transport Commission v. Gourley, the House of Lords ruled that when calculating damages for personal injuries resulting from a tort, the court will take into account the tax liability in respect of his loss of earnings (both past and prospective).58 This rule has been modified over the years in instances where the damages sought would have been taxed.59

Capital gains tax differs from income tax in that it does not cause damages to be reduced. However, the impact of capital gains tax would need to be considered on a case-by-case basis where the application of capital gains tax affects the value of the asset that is said to have suffered the loss.

III EXPERT EVIDENCE

i Introduction

The Civil Procedural Rules 1998 as amended (the Rules) and accompanying Practice Directions deal extensively with the appointment of experts and assessors. At a primary level, the aim of these Rules and Practice Directions is to regulate the use of expert evidence in civil proceedings, in particular to address concerns relating to independence of experts, excessive expenditure and increasing complexity.

ii The role of expert evidence in calculation of damages

Experts can play an important role in assessing damages, particularly where damages are influenced by a range of factors occurring both at and after the date of breach or the application of rates of interest are in dispute.

For example, in Vasiliou v. Hajigeorgiou60 the trial judge found the claimant to be an accomplished restaurateur whose restaurant would have been successful and assessed his loss of profits on that basis. The expected turnover, together with gross and net profit, was calculated with expert evidence and the ultimate decision not to apply a discount was upheld by the Court of Appeal.61

iii The court's role excluding and managing expert evidence

English law provides that expert evidence shall be restricted to that which is reasonably required to resolve the proceedings. The court may therefore control the evidence by giving directions in relation to the issues on which it requires evidence, the nature of the evidence required and the way in which the evidence is to be placed before the court.62 For instance, in Dudding v. Royal Bank of Scotland Plc,63 the court held that the claimants were entitled to rely on the expert evidence concerning the sale of derivatives by the defendant banks as the evidence was reasonably required to resolve the issues.

Courts are required to seek to restrict the excessive or inappropriate use of expert evidence. Under English law, parties are required to seek the court's permission prior to filing an expert report, and their application for permission must include an estimate of the costs of the proposed expert evidence. In British Airways plc v. Spencer, the court held that when assessing whether to admit expert evidence, the court will consider whether the evidence is necessary (i.e., whether a decision could be made without it) or if it is of marginal relevance. The courts will strike a balance if it is of marginal relevance by taking into account the value of the claim, the effect of a judgment on the parties, how the commissioning of the evidence would be paid for, and any delay likely to be entailed by the production of such evidence.64

Permission given by the court is limited to the expert or field specifically identified in the parties' application, and the court can limit the amount of the expert's fees and expenses that can be recovered from the other party.65 In Darby Properties Ltd and Darby Investments Ltd v. Lloyds Bank plc,66 the Master reviewed several authorities on expert evidence in interest rate swap cases together with case law. On finding that there was not a consistent approach, he concluded that while a judge would benefit from evidence explaining the specific financial products, this could be done by way of factual evidence and therefore expert evidence was not required.67

Judges are required to give reasons for preferring the evidence of one expert over another and failure to provide such reasoning may be considered valid grounds for appeal.68

iv Independence of experts

English law provides that experts must provide opinions that are independent and uninfluenced by the pressures of litigation. Experts are required to assist the court by providing objective, unbiased opinions on matters within their expertise by considering all material facts (including those that might detract from their opinions) and should avoid assuming the role of an advocate. If a question or issue falls outside their expertise or they are unable to reach a definite opinion, they should make this clear to the court and any change of view should be communicated to all the parties without any delay (and when appropriate, to the court).69 In the case of Arroyo and others v. Equion Energia Ltd (formerly known as BP Exploration Co (Colombia) Ltd),70 the court held that the 'deliberate and serious breach' of the expert was highly relevant in the court's assessment of order of costs paid on an indemnity basis. Similarly, in the case of Igloo Regeneration (General Partner) Ltd v. Powell Williams Partnership,71 a partial indemnity costs award was made against the claimant related to the conduct of its inexperienced expert engineer who made concessions in his joint statement, which undermined the claimant's case on liability.

The courts have reiterated the importance of experts' independence and impartiality in recent cases including Watts v. The Secretary of the State for Health72 and Bank of Ireland v. Watts Group.73 In the former, the court went so far as to criticise the expert for choosing to 'ignore or play down matters that were inconvenient to her assessment of the case'.74 In a recent judgment where the impartiality of experts was criticised, the court emphasised the need for all experts to read Practice Direction 35 to CPR Part 35.75 The judge also re-stated the principles laid down in The Ikarian Reefer case.76 Such principles include that issues of fact in a case that are relevant to the expert must be determined by the court and that experts of like discipline should have access to exactly the same materials. 77

v Novel science and methods 

Expert evidence is typically helpful in the calculation of damages under two methods: the discounted cash flow method and the comparable transactions and comparable trading multiples method.

The discounted cash flow method projects future cash flows and uses a discount rate to estimate the current value of the projected cash flows. This method is best used in instances where the parties are trying to calculate the earning potential of an asset in the future and require expert evidence in the accurate forecasting of such cash flows. Among other things, expert evidence is used to determine the time period in the future that should be used to assess the cash flows, and the appropriate discount rates to be applied in the calculation of the asset value. As explained above, discount rates such as the capital asset pricing model and weighted average cost of capital are two such methods.

Comparable transactions or comparable trading multiples primarily use publicly reported transactions and share prices to arrive at an estimated value of the asset in question, provided that sufficiently comparable transactions and prices exist in the market. Expert evidence can be crucial in determining the comparability of prices in the public domain, and the relevance of the proposed comparisons.

The EU General Data Protection Regulation ((EU) 2016/679) (GDPR) became effective on 25 May 2018. The GDPR is aimed at addressing the collection of data and the way it is processed and used by both individuals and organisations, including in the communication and sharing of information. The full impact of the GDPR on evidence in litigation or arbitration remains to be seen.

IV RECENT CASE LAW

i Triple Point Techology Inc v. PTT Public Co Ltd [2019] EWCA Civ 230

Facts

In a contract for commodities trading software, an issue of principle arose in this appeal as to how to apply a clause imposing liquidated damages for delay in circumstances where the contractor never achieved completion.

Triple Point Technology Inc (Triple Point) designs, develops and implements software for use in commodities trading. PTT Public Co Ltd (PTT) undertakes commodities trading. Both companies entered into a Contract for Commodity Trading and Risk Management System (Contract) for the provision of relevant commodities software within 460 calendar days. Under Article 5 of the Contract, Triple Point would pay damages for delay at the rate of 0.1 per cent of undelivered work per day. The Contract provided for payment in three phases and Triple Point completed Phase I of the Contract 149 days late. When Triple Point requested further payment, PTT refused because Triple Point had not completed the next phase of work. Unwilling to continue work until further payment, Triple Point suspended work and left the site. PTT then terminated the Contract for wrongful suspension of work. Triple Point commenced an action to recover the outstanding sums claimed in its invoices. In response, PTT claimed damages for delay and damages due upon termination of the Contract. The court dismissed Triple Point's claims and awarded PTT liquidated damages for the delay in completing Phase I of the work and on all other phases until the termination of the Contract pursuant to Article 5.3 of the Contract. On appeal, Triple Point contended that Article 5.3 of the Contract does not apply and PTT cannot recover damages at the rate of 0.1 per cent per day until termination. Triple Point argued that Article 5.3 applies only when work is delayed, but subsequently completed and then accepted; it does not apply in respect of work that the employer never accepted.

Decision

After a review of the authorities, the court identified three approaches that have emerged in cases where a contract provides for liquidated damages for delay, the contractor fails to complete the task and a second contractor steps in. In such cases, the courts have held in different circumstances that: (1) the clause for liquidated damages does not apply at all; (2) the clause for liquidated damages applies only until termination of the first contract; or (3) the clause for liquidated damages continues to apply until the second contractor achieves completion of the work of the first contractor. The court found that there is no strict rule that a provision for liquidated damages must be used as a formula to compensate the defendant and in all cases, the court's approach will depend on the wording used in the contract. Here, the clause focused specifically on delay between the contractual completion date and the date when the work was actually completed. Accordingly, it had no application in a situation where the contractor never handed over completed work to the employer. In such circumstances, the remedy would be general damages for delay. PTT was therefore only entitled to liquidated damages according to Article 5.3 of the Contract for the 149 days' delay to completion of Phase I by Triple Point but not the delay in completion of the remaining two phases. For these two phases, PTT could claim only damages in accordance with ordinary principles.

Significance of the decision

This decision offers some clarity on the interpretation of contractual provisions for liquidated damages. The case demonstrates that all three different approaches are potential options for interpreting a liquidated damages clause in an agreement. This decision once again emphasises the importance of the parties' contractual agreement and the continuing readiness of the court to give effect to liquidated damages clauses in commercial contracts, provided it is not a penalty. It is therefore crucial for parties to set out in clear terms what the desired outcomes would be where there is delay in completion of works. One practical use would be to make clear that the liquidated damages clause would continue to apply up until termination of the contract and no further, or that the clause continues to apply even after the termination of the contract up until the completion of all outstanding works by a second contractor. This decision has not restricted the construction of liquidated damages clause to one of the three identified approaches, and means that parties can decide on the effects of their contract by clear drafting of such clauses.

ii Oversea-Chinese Banking Corporation Ltd v. ING Bank NV [2019] EWHC 676 (Comm)

Facts

A key issue in this case was whether the measure of damages sought by the claimant was recoverable as a matter of law.

The claimant sued the defendant for breach of warranty under a sale and purchase agreement (SPA) for the shares in a target company (IAPBL). Under the SPA, the defendant warranted that IAPBL's accounts were properly drawn up and gave a true and fair state of affairs as at the end of 2008. The claimant alleged breach of the warranty because the accounts failed to disclose a liability to Lehman Brothers Finance SA (LBF), which was later settled after the completion of the purchase of IAPBL. This resulted in payment of US$14.5 million to LBF, which the claimant sought to recover in this action. If the substantial liabilities had been disclosed, the claimant argued the SPA would have contained a specific warranty or indemnity in the claimant's favour in respect of the true liability to LBF. The claimant contended that on a claim for breach of warranty of quality on a share sale, the measure of damages claimed could be a hypothetical indemnity and the amount that could have been claimed under that hypothetical indemnity. On the other hand, the defendant argued such measure of loss is not available and the claimant can only recover the difference between the true value of the shares and the value of the shares as warranted.

Decision

The court held that the established measure of loss for breach of warranty on a share sale is the difference between the value of the shares as warranted and their true value (diminution in value). It is a basic principle in awarding damages that the claimant is entitled to be put in the position he or she would have been in if the contract had never been broken. The court therefore rejected the claimant's contention that its loss was referable to a hypothetical indemnity, which it would have negotiated and obtained had the warranted accounts been properly drawn up. It found that such measure of damages suggested by the claimant is unsustainable in law. It upheld that the measure of damages for breach of warranty of quality on a share sale was the diminution in value of the company. The diminution in value is the only appropriate measure of damages, although it may be possible to adjust the valuation methodology as appropriate to arrive at the value of the diminution.

Significance of the decision

This decision highlights the certainty for which English jurisprudence has proved attractive. The diminution in value is the settled measure of damages as it reflects the loss suffered on a breach of warranty in a share sale. A rejection of a hypothetical indemnity means that in future cases claimants must formulate their claim for damages to accord with the extant principle for assessment of damages. The court is unlikely to award any claim on an untested principle, even where a defendant has breached the warranty.

iii One Step (Support) Ltd v. Morris-Garner [2018] UKSC 20

Facts

This case considered when negotiation damages (known as Wrotham Park damages) can be awarded and the legal basis that should guide such an award.

One Step (Support) Limited (One Step) had purchased from the appellants a business providing support for young people leaving care. An important part of this agreement was that the appellants were bound by restrictive covenants preventing them from competing with One Step or from soliciting business from One Step's clients for at least three years. The appellants breached this restrictive covenant by setting up a company that provided competing services to those of One Step. One Step sought an account of profits or alternatively 'negotiation damages' under the principles of Wrotham Park Estate Co Ltd v. Parkside Homes Ltd.78 One of the reasons given by One Step for seeking negotiation damages was the difficulty in establishing the loss the business suffered as a result of the employees' conduct. The trial court held that One Step was entitled to judgment for damages assessed on a Wrotham Park basis or, alternatively, ordinary compensatory damages. One Step elected for damages on the Wrotham Park basis. The Court of Appeal confirmed this decision and the appellants appealed to the Supreme Court.

Decision

Allowing the appeal, the Supreme Court held that the lower court wrongly applied the Wrotham Park principle, and provided clarification on the correct application of the Wrotham Park principle and granting 'negotiation damages'.

The Court observed that the hypothetical fees that the parties would have agreed for release of contractual damages for breach of contract under the Wrotham Park principle were not compensatory damages. It clarified that common law damages for breach of contract were not a matter of discretion for the judge, but claimed as of right, and awarded on the basis of legal principles.79 The courts are not justified in granting negotiation damages just because it was difficult to quantify the financial loss, and negotiation of damages was considered to be a just response. Accepting that financial loss in the present case scenario was difficult to quantify, the Court held that it was still a 'familiar type of loss for which damages were frequently awarded and could be quantified in a conventional manner'. Therefore, the hypothetical release fee is not itself the measure of the claimant's loss in this case.80 The Supreme Court remitted the case back to the High Court to assess the damages actually suffered by One Stop.

Significance of the decision

This is the first decision by the UK's highest court to review extensively the grant of negotiation damages, with an examination of previous cases on this point. The Supreme Court emphasised the traditional rationale for the award of damages, which is that damages are intended to compensate a claimant for loss or damage resulting in the breach of an obligation and negotiation damages are no different. By emphasising the compensatory purpose for an award of damages, including negotiation damages, the Court has provided some level of clarity to the award of this head of damages. Negotiation damages would no longer be awarded by reference to a hypothetical negotiation damages and would going forward, as with other damages, be assessed and awarded based on the actual financial loss suffered by a claimant for the breach of contract. There would likely be less scope for litigants to rely on the lack of clarity in previous cases to claim damages that do not correspond with actual loss suffered because of the breach of contract. A claimant cannot elect how its damages should be assessed and in that way receive a windfall. However, the decision does not take away the difficulty of quantifying the actual loss, a fact that the Court recognised.

iv Axa Insurance UK Plc v. Financial Claims Solutions Ltd [2018] EWCA Civ 1330

Facts

This case considered when it would be appropriate to award exemplary damages, especially in situations where the defendant has made no profit and there are alternative avenues for sanctioning the defendant's wrongful conduct.

The defendants committed serious fraud by issuing two sets of fictitious personal injury claims based on fake documents to the insurance companies. The claimant insurance company conducted an investigation, discovered the claimant's fraudulent conduct and brought claims against the defendants seeking both compensatory and exemplary damages. The lower court awarded compensatory damages to cover the cost incurred in unravelling the fraud, but rejected the defendant's claim for exemplary damages. The reasoning of the court was that the fraud was discovered before the defendants made any profits and, therefore, the second category of Rookes v. Barnard 81 did not apply. The court also suggested that because of the availability of other avenues, such as the criminal courts and the contempt of court jurisdiction as punishment for the conduct of the defendants, exemplary damages could not be awarded. The defendant appealed.

Decision

On appeal, the Court of Appeal held that the lower court wrongly applied the decision in the Rookes case. The Court explained that the second category of Rookes applies to cases where 'the defendant's conduct has been calculated to make a profit for himself which may well exceed the compensation payable to the claimant'.82 In the present case, the compensatory damages granted were limited to the cost of investigation, which was a much lesser sum compared to the profit the defendants would have made had the fraud been successfully executed. The Court observed that exemplary damages are 'available for the case where compensatory damages are inadequate to remove the wrongful gain achieved by the tort'83 and they are punitive in nature.84 The Court further observed, 'the second category requires the Court to analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve'.85 Given the seriousness of the claim and the need to deter and punish the outrageous conduct and abusive behaviour, the Court awarded exemplary damages.86 The possibility of criminal or contempt proceedings against the defendants is irrelevant to the question of whether or not exemplary damages is to be awarded.

Significance of the decision

The Court considered that this case was a 'paradigm' for the award of exemplary damages. Exemplary damages would rarely be awarded, but would always be available as a measure of the court's disapproval of outrageous conduct and abusive behaviour, and to deter and punish such conduct. When the wrongdoer has calculated that the benefit to be derived from the wrongful conduct may well exceed any compensation he or she has to pay the claimant, it would not matter whether the profit was, in fact, made. The Court also affirmed that, in deserving cases, exemplary damages can still be awarded even if other alternatives exist for the sanction of the wrongful conduct.


Footnotes

1 Clare Connellan is a partner at White & Case LLP. The author thanks Emiko Singh, Theresa Puthumana, Katherine Daley and Opeyemi Longe, associates at White & Case LLP, for their contributions to this chapter.

2 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 2-002, citing Livingstone v. Rawyards Coal Co [1880] 5 App Cas 25 at 39.

3 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 9-002–9-006.

4 Chitty on Contracts, 33rd ed, 2018, Chapter 26, Sections 26-022–26-033, 26-047–26-049, and Chapter 27, 27-001.

5 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Sections 4-0018–19. See also the series of cases concerned with breach of restrictive covenants and damages to account for profits, e.g., Wrotham Park Estate Co v. Parkside Homes Ltd [1974] 1 WLR 798, giving rise to Wrotham Park damages.

6 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Sections 3-001–3-016.

7 For the position under English law, see Halsbury's Laws of England, Section 317, citing Ratcliff v. Evans [1892] 2 QB 524 at 528, CA, per Bowen LJ.

8 For the position under English law, see Halsbury's Laws of England, Volume 29, Section 317 and H McGregor, McGregor on Damages (20th ed. Sweet & Maxwell, London 2017), Section 3-008.

9 J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Sections 26-039–26-041.

10 Halsbury's Laws of England, Volume 29, Section 503.

11 J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Sections 26-039–26-041.

12 Robinson v. Harman (1848) 1 Ex 850.

13 H Wöss and others, Damages in International Arbitration under Complex Long-Term Contracts (Oxford University Press, Oxford 2014) Paragraph 4.38. See, e.g., Durham Tees Valley Airport Ltd v. Bmibaby Ltd [2010] EWCA Civ 485.

14 Where a loss has been suffered by another party, this can give rise to the 'black hole' problem, where the damages risk falling into a black hole. The English courts have indicated a willingness to find a solution in such circumstances, where appropriate. See, e.g., McAlpine v. Panatown, [2001] 1 AC 518.

15 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 1-004.

16 Wagon Mound (No. 1) [1961] AC 388; J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Section 26-119. The notion of foreseeability is further analysed below.

17 Hadley v. Baxendale (1854) 9 Exch 341.

18 Hadley v. Baxendale (1854) 9 Exch 341.; H Parsons (Livestock) Ltd v. Uttley Ingham & Co Ltd [1977] EWCA Civ 13.

19 Transfield Shipping Inc v. Mercator Shipping Inc (The Achilleas) [2008] UKHL 48; Supershield Ltd v. Siemens Building Technologies FE Ltd [2010] EWCA Civ 7; Rubenstein v. HSBC Bank plc [2012] EWCA Civ 1184.

20 Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd [1949] 2 KB 528.

21 Lombard North Central plc v. Automobile World (UK) Ltd [2010] EWCA Civ 20. A claimant should nevertheless consider whether to take steps to show how it has mitigated its loss, as failure to do so can be risky. Bulkhaul Ltd v. Rhodia Organique Fine Ltd [2008] EWCA Civ 1452.

22 Lagden v. O'Connor [2004] 1 AC 1067, per Lord Scott, at Paragraph 78.

23 Thai Airways International Public Co Ltd v. KI Holdings Co Ltd (formerly Koito Industries Ltd) [2015] EWHC 1250 (Comm). See also Globalia Business Travel SAU (formerly TravelPlan SAU) of Spain v. Fulton Shipping Inc of Panama [2017] UKSC 43, in which the Supreme Court confirmed that the issue turns on causation: where the claimant has obtained a benefit following a breach of contract and this benefit was caused either by the breach or by the claimant's act of mitigation, the recoverable loss will be reduced by the benefit.

24 C T Salomon, 'Chapter 10: Damages in International Arbitration', in J Fellas and J H Carter (eds), International Commercial Arbitration in New York (2nd ed Oxford University Press, Oxford 2016), p 353.

25 See, e.g., Corr v. IBC Vehicles Ltd [2008] 1 AC 884, per Lord Bingham at Paragraph 15: 'The rationale of the principle that a novus actus interveniens breaks the chain of causation is fairness'.

26 Galoo v. Bright Grahame Murray [1994] 1 WLR 1360, at 1374–1375. See also J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Section 26-076: 'If a breach of contract is one of two causes, both co-operating and both of equal efficacy in causing loss to the claimant . . . the contract-breaker is liable so long as his breach was 'an' effective cause of his loss: the court need not choose which cause was the more effective'.

27 Nulty and others v. Milton Keynes Borough Council [2013] EWCA Civ 15, at Paragraph 35: '[T]he court must be satisfied on rational and objective grounds that the case for believing that the suggested means of causation occurred is stronger than the case for not so believing'.

28 Johnson v. Agnew [1980] AC 367, per Lord Wilberforce at 401.

29 Davies v. Taylor [1974] AC 207 at 213.

30 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Sections 10-001–10-002.

31 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Sections 10-005–10-006.

32 [1911] 2 KB 786.

33 Mallett v. McMonagle [1970] AC 166 at 176.

34 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 10-051.

35 Halifax Building Society v. Urquart-Dykes and Lord [1997] RPC 55 at 87, line 18.

36 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 10-094, referring to inter alia, McGrath v. Kiely and Powell [1965] IR 497 and White v. Jones [1995] 2 AC 207 CA.

37 Assetco Plc v. Grant Thornton UK [2019] EWHC (150) Comm.

38 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 16-001.

39 Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd [1915] AC 79.

40 [2016] AC 1172.

41 [2016] AC 1172 at [32].

42 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 16-014.

43 Triple Point Technology, Inc v. PTT Public Company Limited [2019] EWCA Civ 230; see further explanation of the case in Section IV.

44 Ministry of Justice Consultation Paper CP 3/2013, 'Damages Act 1996: The Discount Rate', at p 4.

45 Federal Commerce and Navigation Co Ltd v. Tradax Export SA [1977] 1 QB 324; J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Section 30-299.

46 Attorney General of Ghana v. Texaco Overseas Tankships Ltd (The Texaco Melbourne) [1994] 1 Lloyd's Rep 473 (HL). See also, Milan Nigeria Ltd v. Angeliki B Maritime Company [2011] EWHC 892 (Comm) Paragraph 57.

47 [1975] 3 WLR 758.

48 Miliangos v. George Frank (Textiles) (No. 2) [1977] QB 489, 497; Helmsing Schiffahrts v. Malta Drydocks Corp [1977] 2 Lloyd's Rep 444, 449.

49 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 20-029.

50 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 20-053.

51 [2016] EWHC 3421 (Pat).

52 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 20-054.

53 Section 35A of the Senior Courts Act 1981.

54 J Chitty, H Beale, Chitty on Contracts (33rd ed Sweet & Maxwell, London 2018), Section 26-272.

55 Miliangos v. George Frank (Textiles) (No. 2) [1977] QB 489, 497; Helmsing Schiffahrts v. Malta Drydocks Corp [1977] 2 Lloyd's Rep 444, 449.

56 Hutchinson v. Harris [1978] 10 BLR 19.

57 National Westminster Bank plc v. Rabobank Nederland [2007] EWHC 1742 (Comm). See also, Hawksford Trustees Jersey Ltd v. Halliwells LLP (In liquidation) [2015] EWHC 2996 (Ch).

58 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 18-002, citing British Transport Commission v. Gourley [1956] AC 185.

59 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 18-005. See, e.g., BskyB Ltd v. HP Enterprise Services UK Ltd [2010] EWHC 862 (TCC) at [77], and Taylor v. O'Connor [1971] AC 115.

60 [2010] EWCA Civ 1475 CA.

61 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Section 10-038; Vasiliou v. Hajigeorgiou [2010] EWCA Civ 1475 CA, Paragraph 15.

62 CPR 35.1 and White Book commentary Paragraph 35.1.1 at page 1127.

63 [2017] EWHC 2207 (Ch).

64 [2015] EWHC 2477 (Ch).

65 CPR 35.4.

66 [2016] EWHC 2494 (Ch), See also, Barings Plc (In Liquidation) v. Coopers & Lybrand (No. 2) [2001] Lloyd's Rep Bank 85.

67 See also White Book commentary Paragraph 35.1.1 at page 1127.

68 Flannery and another v. Halifax Estate Agencies Ltd [2000] 1 WLR 377.

69 CPR 35 Paragraphs 2.1–2.5 and White Book commentary Paragraph 35.18 at page 1160.

70 [2016] EWHC 3348 (TCC).

71 [2013] EWHC 1718 (TCC).

72 [2016] EWHC 2835 (QB).

73 Bank of Ireland and another v. Watts Group Plc [2017] EWHC 1667 (TCC).

74 Watts v. The Secretary of State for Health [2016] EWHC 2835 (QB) at Paragraph 64.

75 Imperial Chemical Industries Ltd v. Merit Merrell Technology Ltd (No. 2 Quantum) [2018] EWHC 1577 (TCC).

76 National Justice Compania Naviera SA v. Prudential Assurance Co Ltd (The Ikarian Reefer) (No. 2) Ikarian Reefer, The (No. 2) [2000] 1 WLR 603.

77 Imperial Chemical Industries Ltd v Merit. Merrell Technology Ltd (No. 2 Quantum) [2018] EWHC 1577 (TCC).

78 [1974] 1 WLR 798.

79 One Step (Support) Ltd v. Morris-Garner [2018] UKSC 20, at Paragraph 95:

Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset…. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.

80 One Step (Support) Ltd v. Morris-Garner [2018] UKSC 20.

81 (No. 1) [1964] AC 1129, at Paragraph 1,226:

Cases in the second category are those in which the defendant's conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff.

82 Axa Insurance UK Plc v. Financial Claims Solutions Ltd [2018] EWCA Civ 1330, at Paragraphs 15 and 25.

83 id., at Paragraph 19.

84 id., Paragraph 35; Ramzan v. Brookwide Ltd [2011] EWCA Civ 985, [2012] 1 All ER 903. Exemplary damages should be principled and proportionate, and the principled basis is to make a punitive award.

85 Axa Insurance UK Plc v. Financial Claims Solutions Ltd [2018] EWCA Civ 1330, at Paragraph 27.

86 id., at Paragraphs 23 and 34.