Blog 07 February 2017

When damages are not an adequate remedy

Author:

Adam Greaves

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Summary and implications

In our previous articles we addressed various heads of loss in different types of claim for damages. However, there are certain instances in which damages will never be an adequate remedy because the damage which is or may be suffered by the claimant is not capable of being remedied by a monetary award. This may be trite law for some of our readers, but it is worth reminding ourselves every now and then that there’s more than one way of looking at a problem. So, for example, an order for specific performance may be made instead of an order for damages:

  • where the subject matter of the contract is unique and so no market substitute can be found;
  • in relation to non-unique goods in circumstances where they are in practice not available;
  • where it is not possible for the claimant to quantify the value of alternative performance, or the value of the rights are impossible to quantify; and
  • if nominal damages are only available for the legal wrong then again the court may be persuaded to make an order for specific performance instead. 

When are compensatory damages inadequate? 

The most common reason for holding that compensatory damages are inadequate is that the claimant has suffered no pecuniary loss. The same reason was given in Wrotham Park v Parkside Homes [1974] 1 WLR 798 (read more here). To recap, houses were built on land in breach of a restrictive covenant. It was decided that a mandatory injunction to knock down houses built in breach of the covenant would be disproportionate as it would remove much-needed housing stock, but that compensatory damages would not be adequate as the value of the claimant’s land was unaffected by the construction of new houses, so the judge made a different assessment of damages and awarded “gain-based” damages, calculated at 5% of the defendant’s anticipated profits. 

“No market substitute” is another reason for not ordering damages, because no amount of damages would enable the claimant to replace the performance of the contract which was unique. We can all imagine many circumstances in which performance may be considered to be unique.

Another test is whether damages are likely to leave the claimant in a worse position than performance of the contract, so damages are deemed to be inadequate if they are just too difficult to quantify. See Esso v Niad [2001] EWHC Ch 458 by way of example. Courts will not award damages if they consider it will leave the defendants in such a position that they can easily break contracts just by paying damages.

The assumption behind the basis of inadequacy is that breach of contract should be “denounced and deterred” by the court, as it wants to preserve the security of transactions. In most cases, compensatory damages will be enough to deter breaches of contract but sometimes the contract breaker will abuse his bargaining position in order to avoid compensation and this requires an alternative remedy. The first remedy to counter the problem of inadequacy of damages is specific performance. In practice, however, the courts are often reluctant to order specific performance. This reluctance can be for a number of reasons such as:

  • the date for performance has passed; or
  • the parties do not wish to have anything more to do with each other; or
  • the contract is for the provision of personal services; or
  • it would be difficult for the court to supervise the performance.

This is not a finite list but just some examples.

As noted above, the main alternative to specific relief is gain-based damages. Gain-based damages have been described as a monetised form of specific performance. This can either take the form a defendant giving up his entire gain or, in the Wrotham Park scenario, having to give back part of a gain.

Conclusion

So, in summary, there are a number of situations in which compensatory damages may be deemed to be an inadequate remedy for breach of contract. In these cases, the court will turn to either specific performance or gain-based damages as alternative remedies in order to protect the contractually promised performance.

Contract drafters often insert a clause limiting liability for loss in certain heads of loss. In AB v CD [2014] EWHC 1 (QB) the claimant applied for an injunction to restrain the defendant from terminating the agreement, arguing that the limitation of liability clause in the agreement would have the effect of the Claimant not being fully compensated for the defendant’s alleged wrongful termination of the contract. The court found for the defendant on this issue, holding that the clause was part of the price the claimant had agreed to pay when executing the agreement.

In a similar case, however, in 2004 the Court of Appeal had decided against the party seeking to rely on the liquidated damages clause and that it would not preclude the court from granting any other appropriate relief: Bath and Northeast Somerset DC v Mowlem PLC [2004] EWCA Civ 115. The judge in AB v. CD sought to distinguish the earlier Court of Appeal decision in Bath by deciding that there was a fundamental difference between a liquidated damages clause seeking to pre-estimate and compensate the full extent of a party’s losses on breach, and a clause stating that certain heads of loss would not be compensated at all. He reasoned that the former evinces a contractual intention of full compensation while the latter does not.

Personally, I find this reasoning to be suspect, as both positions have been fully negotiated by commercial parties, but this is the state of the law with differing authorities on nearly identical facts. At the end of the day, as with so much dispute resolution, the judicial outcome is very fact-specific.