Expenses accrued prior to the formation of the contract: Reliance or Consequential Damages (should be limited)
When two or more parties enter into a contract, which is subsequently broken, the parties that were not responsible for breaking the contract may be entitled to damages resulting from the expenditures incurred after the formation of the contract as well as the expenditures incurred in negotiating the contract.
Anglia Television Ltd. v. Reed stands as precedence for this. In this case, Anglia (the “plaintiff”) contracted Robert Reed (the “defendant”) to star in a television production. The defendant had agreed to come to England to film for the production; however, the defendant later repudiated the contract and informed the plaintiff that he was no longer available to participate in the film. The plaintiff had already incurred large expenses in preparation for filming and sued for recovery of the expenses. The defendant claimed that the plaintiff was not entitled to these expenses because the expenses had been incurred prior him signing the contract.
The court found that the plaintiff could claim the expenses that were incurred before the contract was signed. However, there is a duty to mitigate damages, and the court found that these expenses could only be claimed against the defendant if it was reasonable for both parties to assume that the incurred expenses would be wasted and not reusable by the plaintiff if the contract was broken.
This case illustrates the importance of:
- Specifying which expenses are included as part of a contract and which expenses are external to the contract;
- The importance of requiring each party to be responsible for their own costs in the term sheet preceding an agreement, or in an agreement itself;
- Ensuring that contracts include a “break fee” or liquidated damages provision that sets out the quantum of expenses (if any) to be payable if the contract is broken; and
- A limitation of liability provision that rejects the application of “reliance” or consequential damages.
Making the Parties Whole - But Caution: No Double-Dipping
If a contract is broken, a court will attempt to place both parties a position equivalent to the position that would have resulted from the contract being performed. As a result, when a contract is broken, an individual cannot claim for both profits and expenses, as this would result in double compensation. The reasoning for this is that a party would need to incur the expenses in order to make the profit.
Pitcher v. Shoebottom [1971] stands as a precedent for this. This case represents an example of disgorgement, the forced surrender of profits obtained by illegal and/or unethical acts. In this case, the plaintiff had made an oral agreement to purchase land from the defendant; however, the defendant subsequently sold the land to another party, thus breaching the contract between the plaintiff and the defendant. The plaintiff had made several prior payments towards the purchase of the land. The plaintiff sued for the payments made towards the payment of the land and for the profits that would have been accrued had the contract been completed.
The value of the land during the agreement was $2,000, whereas the value during the court trial was approximately $8,000. The court found that the plaintiff was entitled to this difference in value because the defendant had wrongfully attained those profits. The court also found that the plaintiff was entitled to have the payments made towards the purchase of the land returned.
Finally, the court did not award the plaintiff with the expenditures that had been accrued prior to the agreement, such as the cost of surveying the land and investigating the title, because these expenditures would have been necessary if the transaction had been completed as planned. The court’s main objective was to allow the plaintiff to be a situation similar to the situation had the contract been performed.
This case illustrates the importance of specifying which expenses are included as part of a contract and which expenses are external to the contract. Should the contract be broken, it is important to disclose the expenses that can be recovered.
Unfulfilled contracts - damages will equal what is required to fulfill the contract
When drafting a contract, ensure that you specify whether or not the outcome of that contract is guaranteed. If you find yourself in a situation where the outcome of the contract may be difficult to obtain, ensure that you include language that protects you from failure to deliver what you promised.
For example, if you ensure that a certain procedure will cure an illness, ensure that the contract between you and the other party states your liability should the procedure fail. If this liability is not explicitly stated in your contract, then a court will likely award damages to the patient that is equal in value to the difference between the value of what was promised and what was received.
Hawkins v. McGee [1929] stands as a precedent for this. In this case, Hawkins (the “plaintiff”) approached McGee (the “defendant”) to inquire about having the scars on his hand removed. The defendant guaranteed that he could remove the scars from his hand. The defendant used a skin grafting technique using skin from the plaintiff’s chest to remove the scars. The technique failed to remove the scars, and the skin graft further caused the plaintiff’s palm to grow hair. The plaintiff sued for breach of contract, and sought damages for the pain from the operation and the damage caused to his hand.
The court awarded damages that were equal to the difference between the value of what the plaintiff was guaranteed to receive and what the plaintiff actually received. The value was calculated as being the cost of correcting the error from the procedure and removing the scars. The court found that the plaintiff should be awarded damages that are equal to the amount needed to place the plaintiff in the position that the plaintiff would have been in had the contract been completed.
In another example, in Groves v John Wunder [1939], S.J. Groves & Sons Company (the “plaintiff”) leased a plant for excavating and screening gravel to John Wunder Co. (the “defendant”). The two parties agreed that the defendant would remove the sand and gravel from the property and leave the land at a uniform grade at the end of the contract. However, the defendant instead removed the richest portions of the gravel and failed to leave the property at a uniform grade. The plaintiff stated that the cost of bringing the property to uniform grade would be $60,000.
The court noted that the cost to the defendant, given their experience in performing tasks of this nature, would have been $12,160 had the contract been properly fulfilled. However, since the defendant had abandoned the project, the court found that the plaintiff was entitled to the cost to perform the part of the contract that had been breached. The contract required the defendant to leave the property at a uniform grade and the cost of performing this task at present was $60,000. Therefore, the plaintiff was awarded $60,000 in damages.
To avoid damages of this nature:
- Avoid specific representations and warranties - unless you are certain you can achieve them;
- Provide stages of approval within the contract that require offer and acceptance at the conclusion of any stage and the commencement of a new stage;
- Make sure that you have the funds to fulfill the contract if you’re forced to make good on it; and
- Add language to the contract limiting your liability to the amount paid to you under the contract (or some other lesser amount). So a refund can be made of the money received.