05. remedies

The question

A right that cannot be vindicated is, as Course 1 observed, no right at all; the value of a contractual obligation depends upon the remedy the law affords when it is broken. The previous sub-unit examined breach; this sub-unit examines its consequences, the relief the law gives to the party injured by a breach. The question is what remedies the law provides, how they are measured, and what limits the law imposes upon recovery. The answer centres upon the award of damages, the standard remedy across the traditions, and examines the circumstances in which the law will instead compel actual performance, together with the limits that confine recovery within just bounds.

Damages and the expectation measure

The standard remedy for breach of contract is an award of damages, a sum of money paid by the party in breach to the innocent party to compensate for the loss the breach has caused. The aim of contractual damages is compensatory rather than punitive: the law seeks to make good the innocent party's loss, not to punish the party in breach, and the measure of damages is fixed accordingly. The governing measure across the developed traditions is the expectation measure, under which damages are assessed so as to place the innocent party, so far as money can, in the position it would have occupied had the contract been performed.

This measure connects to the nature of the contractual obligation, for the contract entitled the innocent party to performance, and the law's compensation accordingly protects the innocent party's expectation of performance, its interest in receiving what the contract promised. The expectation measure distinguishes contractual damages from the compensation awarded for some other wrongs, which may aim instead to restore the injured party to the position it occupied before the wrong rather than the position promised performance would have produced. By protecting the expectation, the law gives the contractual promise its economic value, since the promisee may recover the benefit the promise would have conferred, and this protection of expectation is what makes the contract a reliable foundation for commercial planning.

Consider a buyer who contracts to purchase goods at a fixed price and whom the seller fails to supply, so that the buyer must obtain equivalent goods elsewhere at a higher price. The expectation measure awards the buyer the difference between the contract price and the price the buyer had to pay for the substitute, placing the buyer in the position it would have occupied had the seller performed, since the buyer would then have obtained the goods at the contract price. The example shows the expectation measure compensating the innocent party for the lost benefit of performance.

Damages are therefore the standard remedy for breach, compensatory in aim and measured by the expectation principle, which places the innocent party in the position performance would have produced, thereby protecting the value of the contractual promise and the commercial planning that rests upon it.

The limits on recovery: remoteness and mitigation

The expectation measure does not entitle the innocent party to recover every loss that follows from a breach, however remote or however avoidable, and the law confines recovery through two principal limiting doctrines, recognised broadly across the traditions. The first is remoteness: the innocent party may recover only those losses that were a foreseeable consequence of the breach, losses of a kind that the party in breach should have contemplated, at the time of contracting, as a probable result of a breach. Losses that are too remote, that no reasonable party would have foreseen as flowing from the breach, are not recoverable, for it would be unjust to hold a party liable for consequences beyond what it could reasonably have anticipated when it undertook the obligation.

The second limiting doctrine is mitigation: the innocent party must take reasonable steps to reduce the loss the breach causes and cannot recover for loss it could reasonably have avoided. A party who, faced with a breach, fails to take the reasonable measures available to limit its loss bears the consequence of that failure itself, since the law will not compensate avoidable loss. These two doctrines connect to the compensatory aim of damages, for each ensures that the award reflects the loss the breach genuinely and unavoidably caused rather than losses that were unforeseeable or that the innocent party could have prevented. Together they discipline the award, holding the party in breach liable for the foreseeable and unavoidable consequences of the breach and no more.

Suppose a seller fails to deliver goods, and the buyer, able to obtain substitute goods readily on the market, instead delays and suffers a far greater loss when the market price rises sharply. The buyer may recover the loss it would have suffered had it mitigated by promptly buying a substitute, but not the additional loss caused by its own failure to act reasonably. Were the buyer to claim an extraordinary loss of a kind the seller could not have foreseen as a probable result of non-delivery, that loss would be irrecoverable as too remote. The example shows remoteness and mitigation confining recovery to the foreseeable and unavoidable loss.

Remoteness and mitigation are therefore the principal limits the law places on the recovery of damages, the one excluding losses the party in breach could not reasonably have foreseen and the other excluding losses the innocent party could reasonably have avoided, so that the award compensates the genuine and unavoidable consequences of the breach.

Liquidated damages and penalties

Commercial parties frequently fix in advance the sum payable upon a breach, and the law's treatment of such a provision is an important matter of commercial practice. A liquidated damages clause is a term that specifies, at the time of contracting, the sum that one party will pay the other upon a defined breach, a genuine attempt to estimate in advance the loss the breach would cause. Such a clause serves commercial certainty, since it tells the parties in advance the consequence of a breach and spares them the difficulty and expense of proving loss after the event, and the law gives effect to it.

The law distinguishes the liquidated damages clause, which it enforces, from the penalty, which in several traditions it does not. A penalty is a provision that stipulates a sum out of all proportion to any loss the breach could cause, imposed not to compensate but to deter breach by threatening an exorbitant payment. The common law tradition has historically refused to enforce a penalty, confining the innocent party to its actual loss, on the ground that the law's aim is compensation rather than punishment, though the modern law asks more broadly whether the clause protects a legitimate interest of the innocent party or merely imposes a detriment disproportionate to that interest. The civil law traditions more readily enforce an agreed sum but commonly empower a court to reduce a sum that is manifestly excessive. The connecting idea, across the traditions, is that the law respects the parties' agreed pre-estimate of loss while guarding, by one means or another, against a stipulated sum that is extravagant and unconscionable.

Imagine a construction contract providing that the contractor shall pay a fixed sum for each week of delay in completion, the sum being a reasonable pre-estimate of the loss delay would cause the employer. The clause is a liquidated damages clause and is enforceable, giving both parties certainty as to the consequence of delay. Were the sum instead fixed at a figure vastly exceeding any conceivable loss, designed to terrorise the contractor into performance, it would be a penalty, and the law would relieve against it, whether by refusing to enforce it or by reducing it. The example shows the law upholding the genuine pre-estimate while controlling the extravagant penalty.

The liquidated damages clause is therefore a valuable instrument of commercial certainty that the law enforces as a pre-estimate of loss, distinguished from the penalty, which the law controls, by refusal of enforcement or by reduction, so as to confine recovery to a sum bearing a reasonable relation to the innocent party's legitimate interest.

Specific performance

Damages are not the only remedy, and in some circumstances the law will instead compel the party in breach actually to perform the contract, a remedy termed specific performance, an order of the court requiring a party to carry out its contractual obligation rather than merely to pay compensation for failing to do so. The availability of this remedy differs markedly between the two great traditions, and the divergence is an important family-level proposition.

In the common law tradition, specific performance is an exceptional remedy, available only where damages would be inadequate to compensate the innocent party, as where the subject matter of the contract is unique and no substitute can be obtained on the market, so that money cannot replace what the contract promised. The common law's primary remedy is damages, and it compels performance only where compensation will not suffice, a reflection of the equitable origin of the remedy examined in Course 1. In the civil law tradition, by contrast, the right to performance is regarded as the primary entitlement of the creditor, and specific performance is more readily available as the ordinary vindication of the contractual obligation, the creditor being entitled in principle to the very performance promised. The connecting idea is that both traditions recognise the remedy of compelled performance, but they differ in whether they treat it as the exception, granted where damages fail, or as the rule, expressing the creditor's primary right to performance.

Consider a contract for the sale of a unique asset, such as a particular parcel of land or a unique commercial chattel, which the seller refuses to deliver. In the common law, damages would be inadequate because the asset is unique and irreplaceable, so the court may order specific performance, compelling the seller to convey the asset. In the civil law, the buyer's entitlement to the very thing promised supports an order for performance more readily still. Were the contract instead for ordinary goods freely available on the market, the common law would refuse specific performance and leave the buyer to damages and a substitute purchase. The example shows specific performance compelling actual performance where it is the appropriate vindication of the contractual right.

Specific performance is therefore the remedy that compels actual performance of the contract, exceptional in the common law and granted only where damages are inadequate, and more readily available in the civil law as the primary vindication of the creditor's right to the performance promised, the two traditions converging in compelling performance of contracts for unique subject matter that damages cannot replace.