Damages under English Law

English law has a long-standing tradition and a clearly structured system of awarding damages, developed over centuries through case law and precedent. An understanding of the principles governing damages under English law is essential for international contracts and disputes, as English law is often chosen as the applicable law in commercial agreements.

In this article, we will examine the key aspects of the system of awarding damages under English law, including the different types of damages, the principles governing their assessment, and possible contractual limitations.

Principles of Awarding Damages under English Law

Before addressing specific types of damages, it is important to understand the fundamental principles on which the English system of awarding damages is based. These principles have been shaped through centuries of case law and provide an essential conceptual foundation for the entire system.

Causation

The principle of causation is one of the most important in English law concerning the award of damages. Under this principle, the claimant must prove that the losses suffered were directly caused by the defendant’s breach. English courts apply a two-stage test to establish causation:

• The “but-for” test – would the loss have occurred but for the breach? If the answer is negative, there is factual causation.
• Legal causation – is the causal link sufficiently close and direct from a legal standpoint?

In complex cases where the loss may have been caused by several factors, English courts apply the “material contribution” principle. According to this principle, the breach must have made a material contribution to the loss, although it need not be the sole cause.

Remoteness of Damage

The principle of remoteness sets the limits of a defendant’s liability. Not all losses factually caused by a breach are recoverable – only those that are not considered “too remote”. This principle determines whether the causal link between the breach and the loss is sufficiently direct to justify an award of damages.

Foreseeability is a key component of the principle of remoteness. It assesses whether the parties could reasonably have foreseen such losses at the time the contract was made. Both aspects were formulated in the landmark case of Hadley v Baxendale [1854] EWHC J70 and later refined in Victoria Laundry v Newman Industries [1949] 2 KB 528.

Under the principles of remoteness and foreseeability, damages are recoverable only if they:

• Arise naturally, according to the usual course of events, from the breach (the first rule in Hadley v Baxendale); or
• Were reasonably contemplated by both parties at the time of contracting as a probable consequence of the breach, taking into account any special circumstances known to them (the second rule in Hadley v Baxendale).

Thus, at the heart of the principle of remoteness lies the question: were the losses foreseeable to the defendant at the time the contract was made? If so, they are not “too remote” and are recoverable.

The principle of remoteness is best illustrated by the landmark case of Hadley v Baxendale [1854] EWHC J70, which laid the foundation for the modern doctrine of remoteness under English law.

Hadley v Baxendale [1854] EWHC J70

The facts of the case were as follows: Hadley’s mill in Gloucester ceased operations due to a broken crankshaft. The mill owners entered into a contract with the carrier, Baxendale, for the delivery of the broken shaft to a manufacturer in Greenwich so that a new one could be made. The carrier delayed the delivery by several days, resulting in the mill remaining shut down longer than anticipated.

The mill owners brought a claim for loss of profits for the entire period during which the mill was idle due to the delay. However, the court refused to award such damages, finding that the carrier could not have foreseen that:

• The mill had been completely shut down as a result of the broken shaft; and
• The owners did not have a spare shaft available.

The court emphasised that these special circumstances had not been communicated to the carrier at the time of contracting. As a result, the carrier could not reasonably have contemplated that a delay in delivery would lead to a complete shutdown and loss of profits.

The court established two principles, which became known as the “rules in Hadley v Baxendale”:

• The first rule: a party is liable for losses arising naturally, according to the usual course of events, from the breach of contract.
• The second rule: a party is also liable for losses which could reasonably have been contemplated as a probable consequence of the breach, having regard to any special circumstances known to the parties at the time of contracting.

This precedent established an important limitation: loss of profit and other indirect losses are recoverable only if they were foreseeable to the breaching party at the time the contract was made.

The practical application and development of the principles of remoteness set out in Hadley v Baxendale can be observed in the case of Victoria Laundry v Newman Industries [1949] 2 KB 528.

Victoria Laundry v Newman Industries [1949] 2 KB 528 and the Development of the Foreseeability Test

Victoria Laundry, a commercial laundry business, purchased a large boiler from Newman Industries. The supplier delayed delivery of the boiler by five months due to damage sustained during its dismantling.

The laundry business sought to recover damages for:

• The profit lost as a result of being unable to expand its business without the new boiler; and
• Particularly lucrative contracts with the Ministry of Supply that it was unable to perform.

The court awarded damages for the first type of loss but rejected the claim for the second. As a result of this case, Asquith LJ made several important clarifications to the foreseeability test:

• A defendant is required to foresee only the general type of loss, not the precise amount or detailed circumstances (it was sufficient that Newman knew the boiler was intended for commercial use in a laundry).
• The test is objective: the question is not whether the defendant actually foresaw the losses, but whether a reasonable person in the defendant’s position ought to have foreseen the possibility of such losses.
• Foreseeability is assessed based on the knowledge available to the defendant at the time the contract was made (Newman was not aware of the particularly lucrative contracts).
• The probability of loss occurring is not the determining factor for remoteness; the sole question is whether the loss was reasonably foreseeable.

This case clarified that the boundary between recoverable and “too remote” losses is determined through the lens of what was reasonably foreseeable to the breaching party at the time of contracting. It confirmed that foreseeability is the central element of the principle of remoteness of damage under English law.

The Duty to Mitigate Loss

English law requires a claimant to take reasonable steps to mitigate their losses following a breach. This principle, known as the “duty to mitigate,” reflects the general English law approach aimed at economic efficiency and fairness.

Under this principle:

• A claimant cannot recover losses that could have been avoided by taking reasonable steps.
• Reasonable expenses incurred in attempts to mitigate losses may themselves be recoverable.
• A claimant is not required to take excessive or burdensome measures to mitigate.

In commercial disputes, this often obliges claimants to seek alternative contracts or suppliers following a breach.

The Compensatory Nature of Damages

A fundamental principle of English law is that the award of damages is compensatory, not punitive. The objective of damages is to place the injured party, so far as money can achieve it, in the position they would have been in had the breach not occurred.

This principle was clearly articulated in Robinson v Harman (1848) 1 Ex Rep 850:

The rule of the common law is, that where a party sustains loss by reason of a breach of contract, he is, so far as money can do it to be placed in the same situation, with respect to damages, as if the contract had been performed.

Unlike the position in United States law, English law generally does not recognise the concept of punitive damages, except in very limited circumstances, and principally in tort cases rather than in contractual disputes.

Types of Damages under English Law

English law distinguishes between several key types of damages, each with its own characteristics and applications in different situations. An understanding of these distinctions is critical for successfully asserting one’s rights in legal proceedings.

General and Special Damages

Before addressing more specific types of damages, it is important to understand the fundamental distinction drawn in English law between general damages and special damages.

• General damages are losses that naturally arise from the breach and do not require particular proof of their occurrence (although the amount must still be proven). They represent the typical losses expected to result from a given type of breach, such as a loss in market value due to delayed delivery.
• Special damages are particular or unusual losses arising from specific circumstances of the parties, which would not usually arise in the ordinary course of events. They fall under the “second rule” in Hadley v Baxendale and require proof not only of the amount but also of the fact of their occurrence. To recover special damages, it must also be shown that the defendant knew or ought to have known of the special circumstances leading to the loss.

This classification overlaps with other types of damages. For instance, loss of profit may qualify as either general or special damages, depending on the circumstances of the case.

Nominal Damages

Nominal damages are a symbolic award made where a legal right has been infringed but no substantial financial loss has been proven. They are declaratory in nature, confirming that a claimant’s rights have been breached even if this has not resulted in material loss.

In English court practice, nominal damages are usually awarded in a token amount, often £1 or £2. Their purpose is not so much to compensate but to establish the breach of rights and secure the claimant’s legal position.

What are nominal damages in the context of contract law? In contractual relationships, nominal damages may be awarded when one party has breached the contract but the other party has not suffered significant loss. This can be important in affirming contractual rights, even where no serious financial consequence has arisen from the breach.

The modern understanding and application of the concept of nominal damages is best illustrated by the leading case of Bunge SA v Nidera BV [2015] UKSC 43, decided by the Supreme Court of the United Kingdom in 2015.

Bunge SA v Nidera BV [2015] UKSC 43 and the Modern Application of Nominal Damages

This case provides an important illustration of how the doctrine of nominal damages is applied in high-value commercial contracts.

Facts of the Case: On 10 June 2010, Bunge (the seller) entered into a contract with Nidera (the buyer) for the sale of 25,000 metric tonnes of Russian wheat from the 2010 harvest, on FOB Novorossiysk terms. The original shipment window was August 2010, subsequently narrowed to 23–30 August 2010. The contract incorporated the standard Gafta 49 terms, including a prohibition clause, providing for automatic cancellation if an export prohibition were imposed.

On 5 August 2010, the Russian government announced an export embargo on wheat, effective from 15 August to 31 December 2010. On 9 August, Bunge notified Nidera of the cancellation of the contract under the prohibition clause. However, at the time of the notice, the prohibition had not yet taken effect, and the start of the shipment period (23 August) was after the embargo’s commencement date. Thus, it was not yet certain that the embargo would actually prevent performance, and Bunge still formally had the opportunity to perform (for instance, the prohibition could have been lifted or postponed).

Arbitration Proceedings: Nidera treated the notice of cancellation as a wrongful anticipatory repudiation. It accepted the repudiation on 11 August 2010 and commenced Gafta arbitration proceedings, claiming compensation of US$3,062,500 — the difference between the contract price and the market value of the wheat on the date of breach.

Supreme Court Decision: The Supreme Court confirmed that Bunge had breached the contract by cancelling before performance was actually rendered impossible. However, the Court also found that the Russian embargo did come into effect shortly afterwards, meaning that shipment between 23 and 30 August 2010 would have been impossible. Thus, even without the repudiation, the contract would have been lawfully cancelled in due course.

Lord Sumption, delivering the leading judgment, stated:

If the contract had not been repudiated, it would have been lawfully cancellable. If it was lawfully cancellable, the charterer would have been entitled to avail himself of that right regardless of his motive. The only question is whether he would in fact have done so…

As a result, the Court awarded Nidera only nominal damages of US$5 instead of the US$3 million claimed.

Significance of the Case: This case is highly significant for English damages law because:

• It confirms that a breach of contract does not automatically entitle the innocent party to substantial damages; absent real loss, only nominal damages may be awarded.
• Subsequent events can be taken into account when assessing damages, even if they occur after the breach.
• It reinforces the compensatory, rather than punitive, nature of damages under English law.

The case is an important example of how English courts focus on the actual economic consequences of a breach, rather than merely the formal occurrence of the breach, when determining the appropriate award of damages.

Loss of Profit

Loss of profit under English law is one of the most common heads of damage in commercial disputes. It refers to the profit that a party would have earned had the contract been properly performed or had the wrong not occurred.

Loss of profit is recoverable under English law, but only under certain conditions:

• The loss must be a direct and foreseeable consequence of the breach;
• The claimant must prove the loss of profit with sufficient precision;
• There must be a clear causal link between the breach and the loss of profit.

Loss of profit damages can include both loss from a specific contract and broader losses, such as reputational damage or loss of market position. Calculating loss of profit is often a complex process, requiring the involvement of financial experts and detailed analysis of business plans.

Loss of Bargain

Loss of bargain refers to situations where a party loses the expected benefit of a contract due to the other party’s non-performance. Unlike loss of profit, which can relate to future earnings, loss of bargain typically concerns the direct benefit the party expected to obtain under the specific contract.

English courts regard loss of bargain as a compensable head of damage, designed to place the injured party in the economic position it would have occupied had the contract been properly performed. This approach underscores the restorative, rather than punitive, purpose of damages in English contract law.

Key aspects of loss of bargain include:

• The difference between the contract price and the market value;
• The loss of particularly advantageous contractual terms;
• Additional costs incurred in entering into a substitute contract.

Liquidated Damages

Liquidated damages under English law refer to a pre-agreed sum specified in the contract as payable upon breach. This practice enables parties to avoid the difficulties associated with proving actual loss in court.

For a liquidated damages clause to be valid under English law, certain criteria must be satisfied:

• The sum must represent a genuine pre-estimate of likely loss, not a penalty;
• The assessment must reflect the difficulty or impossibility of precisely calculating losses at the time of contracting;
• The amount must not be grossly disproportionate to the probable loss.

Penalty Clauses under English Law

It is important to distinguish between liquidated damages and penalty clauses. English law traditionally does not enforce penalty clauses, treating them as unenforceable if they do not constitute a genuine pre-estimate of loss.

Penalty clauses are defined as contractual terms imposing an excessive payment upon breach, the primary purpose of which is to deter or punish the breaching party, rather than to compensate for loss. For almost a century, English courts applied the test established in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1 to distinguish between valid liquidated damages and unenforceable penalties.

Fundamental changes to the approach to penalty clauses were made by the United Kingdom Supreme Court in two conjoined cases: Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2015] UKSC 67.

Cavendish v Makdessi та ParkingEye v Beavis [2015] UKSC 67

In 2015, the United Kingdom Supreme Court considered two conjoined cases which significantly reformed the approach to penalty clauses under English law.

Facts of the Cases:

1. In Cavendish v Makdessi, the dispute concerned the sale of a controlling interest in a major advertising business in the Middle East. The contract provided that, in the event of a breach by the seller (Mr Makdessi) of certain non-compete obligations, he:
   • Would lose entitlement to the final two instalments of the sale price; and
   • Would be required to sell his remaining shares at a significantly reduced price.
2. In ParkingEye v Beavis, the dispute involved a consumer contract for free parking at a shopping centre with a two-hour time limit. ParkingEye charged a fixed sum of £85 for overstaying this limit. Mr Beavis challenged the charge, arguing it was an unenforceable penalty and an unfair term under the Unfair Terms in Consumer Contracts Regulations 1999.

In both cases, the question arose whether the relevant contractual provisions constituted unenforceable penalties.

Supreme Court Decision:

The Court held that both provisions were subject to scrutiny under the penalty rule but found that neither amounted to an unlawful penalty. The Supreme Court departed from the traditional approach and formulated a new test:

1. The key question is whether the impugned provision imposes a secondary obligation (such as the payment of a sum) that is out of all proportion to the innocent party’s legitimate interest in enforcing the primary obligation.
2. If a legitimate interest exists, a provision is not a penalty even if it imposes consequences beyond simple compensation for loss, provided those consequences are not extravagant or unconscionable.

Applying this test, the Court found:

• In Cavendish, the provisions regarding forfeiture of payments and forced sale of shares were not penal. They were intended to protect the buyer’s legitimate commercial interest in preserving the value of the business and preventing harm from competition by the former owner.
• In ParkingEye, the £85 charge served the legitimate aim of ensuring the efficient use of parking spaces for customers and was not disproportionate. It also helped the company cover its operational costs. The Court found the charge was not a penalty and did not breach the regulations on unfair terms.

Assessment of Damages under English Law

The assessment of damages under English law is a complex process based on several key principles. The fundamental rule is that damages aim to restore the claimant to the position they would have been in had the breach not occurred.

English courts apply different methods of calculation depending on the nature of the loss:

1. For contractual damages – the expectation interest principle is applied, comparing the claimant’s actual position with the position they would have been in under proper performance of the contract.
2. For tortious damages – the restoration principle usually applies, seeking to restore the claimant to the position they were in before the wrong occurred.
3. For property damage – either the diminution in market value or the cost of repair or reinstatement is assessed, depending on the circumstances and proportionality.

Contractual Limitations on Liability

English law permits parties to include contractual terms limiting or excluding liability for certain types of loss. Such clauses are an important tool for risk management in commercial relationships.

Typical contractual limitations include:

1. Exclusions of indirect or consequential losses – limiting liability to direct losses and excluding claims such as loss of profit, reputational damage, or other commercial consequences.
2. Caps on the maximum amount of liability – for example, by fixing compensation at a specified amount or linking it to the contract value.
3. Limiting the time for bringing claims – imposing shortened time limits (e.g., six or twelve months) for making claims for breach of contract.
4. Agreed methods of calculating damages – including provisions for liquidated damages.

However, not all liability limitations are valid under English law. In particular, under the Unfair Contract Terms Act 1977, it is not possible to exclude or limit liability for:

• Death or personal injury caused by negligence;
• Fraud or fraudulent misrepresentation;
• Breach of mandatory terms in consumer contracts (e.g., regarding the quality or fitness of goods).

Moreover, in commercial contracts, liability limitations are subject to a reasonableness test – they must be fair and reasonable in all the circumstances. Courts consider factors such as the relative bargaining power of the parties, the availability of insurance, and consistency with market practice.

Conclusion

The system of awarding damages under English law represents a sophisticated mechanism developed through centuries of case law. It encompasses a range of different types of damages, from nominal damages to loss of profit and liquidated damages.

Understanding the characteristics of each type of damages, the principles governing their calculation, and the potential contractual limitations is critical for effective risk management in international commercial transactions. Concepts such as nominal damages in contract law, loss of profit damages, and liquidated damages each have their own distinct features and areas of application.

If you require legal advice on the recovery of damages under English law, please feel free to contact me by email, Telegram, or WhatsApp.