Core principles of contract law - Remedies, causation and re...

Learning Outcomes

After reviewing this article, you will be able to:

• Identify and explain the primary contractual remedies for breach, including damages, specific performance, and injunctions.
• Apply the legal concepts of causation and remoteness when calculating damages.
• Analyse scenarios to determine entitlement to remedies and the limits on recoverability of loss.
• Tackle SQE2-style assessment questions on contract law remedies with confidence.

SQE2 Syllabus

For SQE2, you are required to understand the operation of contract law remedies and their limitations, and to be able to apply those principles directly to problem questions. Key syllabus points covered include:

• Calculation and assessment of damages for breach of contract.
• Legal and equitable remedies, including specific performance and injunctions.
• Principles of causation and remoteness in contract.
• Mitigation of loss and limitations on recovery of damages.
• The difference between expectation and reliance measures of damages.
• Liquidated damages and penalty clauses.
• How contractual remedies interact with performance and the discharge of a contract.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Explain the primary aim of damages for breach of contract under English law.
2. What must a claimant prove to recover damages when a contract is breached?
3. What is the difference between direct and consequential loss, and how does remoteness limit recoverability?
4. In what circumstances may a party obtain specific performance rather than damages?

Introduction

Remedies for contract breach aim to put an injured party in the position they would have been in if the contract had been properly performed. Whether in assessment or practice, understanding these remedies—and the legal principles limiting their scope—is a core requirement for SQE2. This article sets out the legal basis for contractual remedies, then explains the limitations of causation and remoteness, and how they impact claims for loss.

Damages: The Primary Remedy

The usual remedy for breach of contract is damages—a payment of money to compensate for loss. These damages are compensatory, not punitive.

Key Term: damages
Financial compensation awarded to reflect the loss resulting from a breach of contract.

The Aims and Limits of Damages

The objective is to put the claimant in the position they would have been in had the contract been properly fulfilled. This is known as the expectation interest.

However, damages are not always assessed purely on expectation: other measures, such as reliance or restitution, may sometimes be relevant. Importantly, certain losses are not recoverable—only those losses caused by the breach and not too remote.

Key Term: expectation interest
The financial benefit a party would have gained from complete performance of the contract.

Causation

To recover damages, there must be a clear causal link between the breach and the loss.

Key Term: causation
The requirement that the breach led directly to the loss claimed.

The claimant must prove that "but for" the breach, the loss would not have occurred.

Worked Example 1.1

A retailer contracts to buy 100 units of stock from a supplier for £1,000 but the supplier fails to deliver. The retailer pays £1,300 to source replacement stock. Is the additional cost recoverable?

Answer:
Yes. The retailer can recover £300 because this cost was caused by the supplier’s breach and would not have been incurred "but for" the breach.

Remoteness

Causation is not enough: the loss must not be too remote. The test comes from Hadley v Baxendale: is the loss of a type that would arise naturally from the breach, or was it within the parties’ contemplation at contract formation?

Key Term: remoteness
The legal principle that limits damages to losses that were reasonably foreseeable at the time the contract was made.

If unusual or unexpected loss occurs, it is recoverable only if both parties were, or should have been, aware of special circumstances.

Worked Example 1.2

A manufacturer delivers a replacement part late. The buyer loses a lucrative resale contract with a third party as a result, and seeks to recover lost profits.

Answer:
If the supplier was not told of the buyer’s intentions at contract formation, the exceptional loss is likely too remote to satisfy the legal test, so the buyer cannot recover the profits.

Revision Tip

Assess remoteness by asking: could the loss have been foreseen as a real possibility (not mere probability) when the contract was made?

Assessment of Damages

Damages are most commonly calculated by reference to either:

• Difference in value: The value of what was supplied versus what was required under the contract.
• Cost of cure: The amount needed to remedy any defect or non-performance.
• Loss of profit: Profits reasonably expected but lost as a result of breach.

Only actual, proven loss caused by the breach is compensable. If no loss is suffered, nominal damages may be awarded.

Key Term: nominal damages
A token sum awarded where a breach occurred but no loss resulted.

Mitigation

A claimant must take reasonable steps to avoid or reduce loss. Damages will be reduced by any benefit which could have reasonably been obtained following the breach.

Key Term: mitigation
The obligation on a party to minimise loss—and not recover damages for loss which could have been reasonably avoided.

Exam Warning

A claimant who rejects an opportunity to limit their loss cannot recover damages for avoidable extra amounts.

Liquidated Damages and Penalties

Contracts may specify in advance the damages payable for breach. Clauses that provide a genuine pre-estimate of loss are known as liquidated damages and are generally enforceable. If, however, the amount stipulated is excessive and designed to penalise, it may be struck down as a penalty.

Key Term: liquidated damages
Contractual clauses setting a fixed sum for breach, representing a genuine attempt to estimate loss.

Key Term: penalty
A contractual sum which is out of proportion to the anticipated loss and intended to deter breach, not to compensate.

Equitable Remedies: Specific Performance and Injunctions

Sometimes, monetary damages will not provide adequate relief. In those cases, the court may order:

• Specific performance: Compelling the defaulting party to perform their contractual obligations.
• Injunction: An order not to breach some negative promise within the contract.

Orders for specific performance or an injunction are always discretionary and will rarely be granted if damages suffice.

Key Term: specific performance
A court order requiring a party to carry out their contractual obligation.

Key Term: injunction
A court order requiring a party to do, or refrain from doing, a particular act.

Worked Example 1.3

A buyer contracts to buy a piece of art from a seller, but the seller refuses to complete the sale. Can the court order specific performance?

Answer:
Yes. As artwork is unique and damages would not adequately compensate the buyer, the court may compel the seller to hand over the painting.

Summary Table: Legal Remedies Compared

Key Point Checklist

This article has covered the following key knowledge points:

• The principal remedy for breach of contract is compensatory damages.
• Only losses caused by the breach and not too remote are recoverable.
• The claimant must mitigate their loss.
• Liquidated damages clauses are enforceable if they reflect a genuine pre-estimate of loss, but penalty clauses are not.
• Equitable remedies (specific performance, injunction) are discretionary and only available where damages are inadequate.

Key Terms and Concepts

• damages
• expectation interest
• causation
• remoteness
• nominal damages
• mitigation
• liquidated damages
• penalty
• specific performance
• injunction