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What are Damages in Australian Contract Law?

An Overview on Damages in Australian Contract Law

When a party breaches a contract, the other party to the contract may be entitled to damages as a remedy. In contract law, an award of damages is intended to be compensatory and to place a party in a position as though there was performance of a contract (Paterson & Robertson, 2020). Conversely, the object of an award of damages is to place the plaintiff in a position as though “the defendant performed the obligation breached” (Carter, 2018, p. 879).

An award of damages in contract law is not intended to penalise or be punitive (Paterson & Robertson, 2020; Carter, 2018). Rather, contract damages can be viewed as “hypothetical performance damages” because the inquiry is about the hypothetical situation of a contract being performed (Seddon & Bigwood, 2023, para 23.6).  Particularly, Australian and English courts generally view contract damages as being compensatory in nature (Paterson & Robertson, 2020).

In this article, we address the frequently asked questions regarding the types of damages that may be available in Australian Contract Law:

What are Expectation Damages?

Expectation damages are an award of damages that compensates a plaintiff for the loss that they would have benefited if a contract was performed, or “for the loss of the promised performance” (Paterson & Robertson, 2020, p. 542). Therefore, the law protects “not only the expectation of receiving performance, but also the expectation of receiving the benefits that will flow from its performance” (Seddon & Bigwood, 2023, para 23.6). Others similarly describe the aim of “all expectation damages” is to “vindicate the plaintiff’s performance interest and to provide a pecuniary substitute for performance itself” (Barnett, 2016, p. 163).

In comparison, expectation damages also reflect societal expectations. A plaintiff’s loss and damage is “measured against the normative position of the party’s expectation of contractual performance” (Thomson & Durand, 2022, p. 361). This reflects a view that an award of expectation damages should compensate for “deficiency in anticipated performance”, rather than “factual detriment actually suffered” (Thomson & Durand, 2022, p.361).

Notwithstanding any abstract discussion on the nature of expectation damages, the simpler legal inquiry on when expectation damages should be awarded can be historically traced to Parke B in the historical English decision of Robinson v Harman (1848) 156 ER 363:

“The next question is: what damages is the plaintiff entitled to recover? The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position with respect to damages as if the contract had been performed.”

This English position has been described as being a central principle to the legal “assessment of contract damages” (Carter et al., 2014, p. 171). It is also a position adopted in Australian courts (Lucke, 1989). Within the Australian context, the High court decision in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 shared the same perspective. Particularly, Mason J and Dawson J stated:

The award of damages for beach of contract protects a plaintiff’s expectation of receiving the defendant’s performance. That expectation arises out of or is created by the contract. Hence damages for breach of contract are often described as ‘expectation damages’.

When calculating expectation damages, the court contrasts the “breach position (the actual gains and harm which occurred) and the non-breach position (the hypothetical gains and harms that would have occurred but for the breach)” (Barnett, 2016, p. 170). The hypothetical non-breach counterfactual is examined objectively by what “the plaintiff had hoped to achieve if the contract had been performed” (Barnett, 2016, p. 170).

What is the Rationale for Expectation Damages?

Modern contract law prefers expectation damages as the “principal remedy for breach of contract” (Paterson & Robertson, 2020, p. 561). There are number of reasons for this preference, and they can be summarised under the following approaches: economic or institutional approach, and juristic approach.

What is the Economic or Institutional Approach for the Award of Expectation Damages?

An award of expectation damages can be viewed through an economic or institutional approach that it protects the present value in the expectation of future performance (Fuller & Purdue, 1936). The “expectancy created by an enforceable promise” is a “kind of profit”, and a breach represents “an injury to that property” that should be properly compensated (Fuller & Purdue, 1936, p. 59). Therefore, a promise obtains a present value because the law recognises and protects the present value of a promise (Fuller & Purdue, 1936).

What is the Juristic Approach for the Award of Expectation Damages?

Expectation damages can also be examined through juristic lens. Fuller & Perdue (1936) claim a purpose of “measuring damages by the expectancy” could be quasi-criminal because it penalises promisors for breaching a promise (p. 61).  The award of expectation damages represents a “metaphorical statement” of a “normative order” that promotes acceptable social and business behaviour (Fuller & Purdue, 1936, p. 53; Thomson & Durand, 2022, p. 362). This normative position also creates a deterrence effect because the award of expectation damages promotes contracts as an attractive instrument that can be relied on for promises (Paterson & Robertson, 2020).

What are Reliance Damages?

Generally, if expectation damages may not be able to be awarded, then a plaintiff may be able to recover reliance damages. Reliance damages is an award of damages for losses reasonably incurred in reliance on a contract. It presumes that the expenditure would have been recoverable if the contract was performed (Seddon & Bigwood, 2023).

This kind of damage recognises a plaintiff’s “real and understanding grievance” and their expenditure on a contract relied on (Carter, 2018, p. 802). It is a legal principle that been articulated in the well-known High Court decision of Commonwealth v Amann Aviation Pty Ltd(1991) 174 CLR 64. Here, Mason CJ and Dawson J stated:

“…the law considers the just result in such a case is to allow a plaintiff to recover such expenditure as is reasonably incurred in reliance on the defendant’s promise”.

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What are Nominal Damages?

Nominal damages are an award of damages that recognises a plaintiff’s legal rights. However, the award does not compensate for any real loss incurred. This principle on nominal damages was articulated in the English decision of Owners of the Steamship ‘Mediana’ v Owners, Master and Crew of the Lightship ‘Comet’  [1900] AC 113. The House of Lords commented that:

A technical phrase which means that you have negatived anything like real damage, but that you are affirming by your normal damages that there is an infraction of a legal right which, though it gives you no right to any real damages at all, yet gives you the right to the verdict or judgment because your legal right has been infringed”.

What are Damages for Loss of Chance?

Damages for loss of chance relates to damages for “the opportunity of obtaining a benefit” (Paterson & Robertson, 2020, p. 554). This places the plaintiff in a hypothetical position that if the contract was performed, there was a chance the plaintiff could have obtained a benefited from that performance.  

Can Exemplary Damages Be Awarded in Australian Contract Law?

In Australia, a plaintiff cannot recover more than what they should be compensated in Australian contract law. Further, as contract damages are not punitive in nature, exemplary damages cannot be awarded to penalise a defendant (Paterson & Robertson, 2020).

Who Carries the Burden of Proof for Claiming Expectation Damages?

The plaintiff that claims expectation damages carries the burden of showing the extent of their damages. As part of this burden, the plaintiff must also establish that the defendant’s breach was causative of their expectation damages on the balance of probabilities, and that their expectation damages are not remote (Carter, 2018; Paterson & Robertson, 2020). 

Bibliography

  • Barnett, K. (2016). Great Expectations: a Dissection of Expectation Damages in Contract in Australia and England, Journal of Contract Law, 33(3), 163-182.
  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Carter, J., Courtney, W., & Tolhurst, G. (2014). Issues of Principle in Assessing Contract Damages. Journal of Contract Law, 31(3), 171-205.
  • Fuller, L & Perdue, W. (1936). Reliance interest in contract damages, Yale Law Journal, 46(1), 52-96.
  • Lucke, H. (1989). Two Types of Expectation Interest in Contract Damages. University of New South Wales Law Journal, 12(1), 98-113. 
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Thomson, J & Durand, M. (2022). The causal effect of hypothetical events upon contractual damages. University of Western Australia Law Review, 49(1), 360-376. 

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Consideration | Intention to Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity of Contract | Classification of Terms | Contract Law (Theories) | Causation | Remoteness |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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