Consequential losses

REMEDIES

Introduction

At this lecture we are considering more generally the award of damages for breach of contract, and the order of 'specific performance', which will instruct a party to perform its obligations under an agreement. Some more general references to injunctions will also be necessary.

In general, as we shall see, the common law aims to put the parties into the position they would have been in had the contract been performed by ordering one party to pay money to the other. Where one of the parties has performed its side of the bargain and is awaiting payment from the other party, this can be achieved by the 'action for an agreed sum', or in sale of goods contracts the 'action for the price'. In other words, the party who has promised to pay for goods or services which have been transferred or performed by the other party, can be required to make good that promise. In other situations, the normal requirement will be for the payment of compensatory damages. An order to perform part of the contract, other than paying money that is owed, is much more unusual.

We start, therefore, by considering the remedy of 'damages', and will then look at specific performance and injunctions.

6.2 Damages: Purpose

The basic principle of contractual damages is that of restitutio in integrum, or full restitution, which involves putting the innocent party into the position it would have been in had the contract been performed. This principle can be traced back to Robinson v Harman, and has recently been restated by Lord Scott in Farley v Skinner:

The basic principle of damages for breach of contract is that the injured party is entitled, so far as money can do it, to be put in the position he would have been in if the contractual obligation had been properly performed. He is entitled, that is to say, to the benefit of his bargain.

The main objective of contract damages is therefore compensation, not punishment. Although, of course, in some situations, a party thinking about breaking an agreement may be deterred by the prospect of having to pay damages, or a party who has broken an agreement may suffer considerably from having to pay compensation, nevertheless these consequences are not the purpose of the award. This is shown by the fact that if the party not in breach has suffered no quantifiable loss, only nominal damages will be awarded. If, for example, there is a failure to deliver goods, and the buyer is able to obtain an alternative supply without a problem, and at a price which is the same or lower than the contract price, no substantial damages will be recoverable.

In relation to this aspect of contract damages, it is important to note the concept of the 'efficient breach'. Looking at the law of contract from the economic point of view, as a means of wealth maximisation, it may make sense for a party to break a contract. The typical example given is where the seller (S) has contracted to sell an item to a buyer (B1) for £100. Before the transaction takes place a second potential buyer (B2) offers S £200 for the item. If S sells to B2, S will receive £200, but may have to pay compensation to B1 for not fulfilling the original contract. But as long as that compensation is below £100, S will still have made a profit. All parties are in theory happy. S has sold the item at a higher price, to B2, to whom the item is obviously more valuable than it would be to B1. B1 has not received the item, but has received damages which fully compensate for any losses.

The concept of 'efficient breach' is most commonly discussed in terms of the advantage to the party breaking the contract in 'maximising gain'. As Campbell has pointed out, however, it should also be recognised as encompassing the situation where the party in breach acts to 'minimise loss'. This may arise, for example, where circumstances change in a way that increases the costs of performance to an extent that the increase exceeds the damages which would be payable to the other party. Here again, the economic answer is that the efficient result is not to enforce the contract, but to allow the party whose costs have increased to escape from it by paying appropriate compensation.

The concept of the efficient breach goes some way to explaining why the law of contract is generally more disposed to award damages than to insist on performance. The analysis works best, however, in relation to discrete business contracts which are fully executory. Once the parties are in a long term relationship, either in respect of the contract under consideration, or as regards a series of contracts, then the economic analysis of the possible advantages of breach becomes much more complex. The risks of endangering the future relationship need to be added in to the equation. Similarly, if one party has already performed part of its obligations (particularly if these are in the form of services, rather than goods or money, thus making restitution difficult), allowing breach plus compensation may not be straightforward. Finally, in relation to consumer transactions, it may well be felt that the need to protect the consumer means that the economically efficient answer is not the one which the courts should support. In addition, consumers may well place a value on what they are seeking to receive under the contract which is higher than the market value - thus giving rise to the concept of what has been called the 'consumer surplus'. It is also important to remember that parties will not always act in the most economically efficient way in relation to a particular transaction: for example, being seen as a firm which honours its contracts may be more 'valuable' (though difficult to quantify) than making a bigger profit on a particular deal. Nevertheless, provided that its limitations are recognised, the concept of the efficient breach is a useful tool to apply in the analysis of the law of damages for breach of contract.

This economic analysis is based on the assumption that, as stated at the beginning of this section, the purpose of contract damages is to compensate. It should be noted, however, that a possibly significant exception to the solely compensatory nature of contract damages has been opened up by the decision of the House of Lords in Attorney General v Blake. It was held there that a defendant could in certain circumstances be required to hand over to the claimant a benefit acquired by breaking a contract, even where there is no corresponding loss to the claimant. This decision and its implications are discussed fully below.

6.3 Damages: Measure

Within the general principle of compensation, there are three basic methods by which damages may be calculated. These are conveniently labelled as 'expectation', 'reliance' and 'restitution'. Some consideration also needs to be given to consequential losses and non-pecuniary losses.

Expectation interest

This is the approach which most clearly relates to putting the innocent party into the position he or she would have been in had the contract been performed. It is concerned with fulfilling the expectations of that party as to the benefits that would have flowed from the successful completion of the contract. In particular, where the innocent party, as will commonly be the case, was expecting to make a profit as a result of the contract, that will generally be recoverable, as well as any other consequential losses flowing from the breach. Suppose, for example, A has a piece of machinery that needs repair, and he engages B to carry out the work. A tells B that the work must be done on 1 November, because A has an order for which he needs the machine on 2 November, and which he will lose if it is unavailable. If B, in breach of contract, fails to carry out the work, A will probably be able to claim the lost profit on the 2 November contract. If B had performed the contract properly, A would have made the profit, and therefore it should be recoverable.

In general, the calculation of the expectation interest is simply a matter of looking at where the claimant would have ended up if the contract had been performed properly. In making that calculation, account must of course be taken of any costs which the claimant may have saved by the defendant's non-performance. It is the claimant's profit on the contract that is recoverable, which will not necessarily involve the defendant in paying the full price of the missing performance. If, for example, in the situation described in the previous paragraph, the non-availability of the machine has meant that A has employed less staff and therefore has a reduced wage bill, this must be taken into account in assessing the profit which has been lost. It also follows that if A would not in fact have made any profit from the transaction, only nominal damages will be recoverable.

There are two situations which may cause particular difficulty for calculation of the expectation interest, and which merit further consideration. First, where the profit was not certain; secondly, where the cost of fulfilling the claimant's full expectation may be disproportionate to the eventual benefit.

In the situation where the profit was not certain to be made, there may be a partial recovery, on the basis that the claimant has lost the chance to make it. In Chaplin v Hicks, for example, the breach of contract prevented the plaintiff from taking part in an audition. She was allowed to recover a proportion of what she might have earned had she been successful in the audition. Similarly, in Simpson v London and North Western Railway Co, the defendant failed to deliver some specimens to a trade fair by the specified date. The plaintiff was allowed to recover compensation for the loss of sales he might have made had the specimens arrived on time. In these cases, it should be noted that the claimant may do better than would have been the case if the contract had not been broken. Ms. Chaplin might not have been selected at the audition, and Mr. Simpson might not have made any sales. The court may be said in fact to be placing a monetary value on what is essentially a non-pecuniary loss - that is, the loss of a chance. Alternatively, it might be said that in this situation the compensatory aspects of contract damages are tinged with a punitive element, in that the defendant is made to pay in order to show that his or her behaviour fell below an acceptable level.

The second area of difficulty in finding the appropriate award to meet the claimant's expectations arises in connection with the situation (usually occurring in construction contracts) where the cost of providing the claimant with exactly what was bargained for may be out of all proportion to the benefit which would thereby be obtained. This problem was given full consideration by the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth.

The defendant in this case entered into a contract for the construction of a swimming pool and building to enclose it, at a cost of £70,000. The depth of this pool at one end was to be 7ft 6in. After the work was completed, the depth of the pool was discovered to be only 6ft 9in. The plaintiff sought to recover payment for the installation of the pool. The defendant counterclaimed that the pool did not meet its specification and sought compensation for this. It was not possible for the pool to be adapted, and the only way to produce a pool with a depth of 7ft 6in would have been by total reconstruction. This would have cost over £20,000. The position under previous case law on this type of situation involving building contracts was that the court would normally allow the recovery of the 'cost of cure' - that is, putting the building into the condition it should have been in if the breach had not occurred. This is subject to the limitation that if the cost of cure is significantly greater than the reduction in value of the property concerned, then the court may refuse to allow it. This limitation did not, however, normally apply to the situation where the 'cure' relates to the defendant providing something which was specifically promised in the contract. Thus, in Radford v De Froberville, the plaintiff was allowed to recover for the cost of building a brick wall, because this is what had been contracted for, even though a cheaper fence would have served the purpose (which was simply to mark a boundary). This aspect of the courts' approach must now be considered in the light of Ruxley Electronics and Construction Ltd v Forsyth. The trial judge found that the pool was entirely suitable for the purpose for which the defendant wished to use it and, given the very high cost of reconstruction, held that the measure of damages should be the difference in value between the pool as supplied, and a pool which met the contract specification. He assessed this difference as nil, but awarded the defendant £2,500 for 'loss of amenity'. The defendant appealed, and the Court of Appeal held that he was entitled to have a pool which met the contract specification. It awarded him damages of over £20,000 to meet the cost of reconstruction. The plaintiff appealed. The House of Lords restored the trial judge's decision. It confirmed that in building contracts there are two principal measures of damages, namely, the difference in value and the cost of reinstatement. Where it would be unreasonable to award the cost of reinstatement, because, for example, the expense would be totally out of proportion to the benefit to be obtained, then the court should award the difference in value. As Lord Jauncey put it:

Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party...

Given that the defendant had a perfectly serviceable swimming pool, 'were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit'. The appropriate measure here was therefore the difference in value, which (given the judge's finding) meant that only nominal damages were recoverable under this head. The House of Lords was, however, prepared to allow the judge's award of £2,500 for loss of amenity' to stand. The precise nature of this award is considered further, below.

The House of Lords' decision in this case appears quite sensible on the facts. Nevertheless, it leaves open the problem that an unscrupulous contractor can apparently now play fast and loose with the contract specifications in a construction contract, provided that the final product is fit for the purposes for which the other party wishes to use it. If it is so fit, then the cost of reconstruction to meet the contract specification is likely to be considered unreasonable, and there may well be little or no difference in the market value of the building. The innocent party is effectively left without a remedy, despite the fact that what has been provided is not what he or she wanted. Comparison can be made with the position as regards sales of goods, where the purchaser may still have a remedy, even if goods are 'fit for their purpose', if they do not match the contract description. By virtue of s 13 of the Sale of Goods Act 1979, the purchaser will generally be able to reject such goods. The person who contracts for the construction of a building now seems to be in a much weaker position. Much will depend on just how far the courts are prepared to go. Suppose, for example, I contract for a house to be built with a special warm air heating system which has to be built into the walls during construction. The builder constructs a house with a conventional gas-fired central heating system and radiators. The house is perfectly fit to be lived in, and its value is not significantly different from the house with a warm air system (indeed, it may have a higher market value). Am I really to be left without any effective remedy against the builder? The principles applied by the House of Lords in Ruxley Electronics v Forsyth would seem to suggest so. This is a situation which might have been dealt with by the restitutionary approach suggested by the Court of Appeal in Attorney General v Blake. The constructors of the swimming pool had delivered a 'skimped performance' and the Court of Appeal's approach would have allowed the court to award to the plaintiff the money that had been saved in not building the swimming pool to the contract specification. This aspect of the Court of Appeal's judgment in Blake was, however, specifically rejected by the House of Lords in that case.

As was noted above, the only award which the plaintiff received in Ruxley Electronics v Forsyth was for 'loss of amenity'. What is the precise nature of this award? There are two possible answers. One is that it is based on the concept of the 'consumer surplus' - that is, that it compensates the claimant for something which has been contracted for going beyond the market value of what is to be provided. The expectation interest must therefore be increased to take account of this. The second possibility is that it is an example of one of the limited range of cases where the courts are prepared to award damages for 'distress and inconvenience' arising as a consequence of a breach of contract. This area is discussed further below, at 6.3.6. The House of Lords' decision in Farley v Skinner has made it clear that the award in Ruxley Electronics v Forsyth should be put into the first category. Farley v Skinner concerned a contract for the survey of a house, where the surveyor had been specifically asked by the prospective purchaser to check on aircraft noise. The surveyor failed to do this properly, and the purchaser, having moved in, sought compensation for the fact that his enjoyment of the property was reduced, though there was no reduction in its market value. The House of Lords approved an award of £10,000 for loss of a benefit which had been contracted for, as distinct from consequential damages for 'discomfort', and in the process confirmed that this was also the correct way to view Ruxley Electronics v Forsyth. This means that the award for loss of amenity' is a separate element in the expectation interest which, in appropriate cases, will be awarded in addition to any other elements (for example, reduction in the market value of what has been supplied). The calculation of the value of a loss of amenity' is always going to be difficult, since it is by its nature 'non-pecuniary' loss. In both Ruxley Electronics and Farley v Skinner, the House of Lords clearly takes the view that the amounts should be modest, and that the awards in both cases were generous to the claimant. No satisfactory method of calculating what should be awarded is put forward, however, and it seems to be left to the virtually unfettered discretion of the trial judge as to how much should be given under this head. This is clearly unsatisfactory, as O'Sullivan has pointed out, but it is difficult to find a solution. The value of the benefit lost is by definition something personal to the claimant, yet the claimant's subjective view cannot be allowed to be the determining factor. It may be that all that can be done is to wait for practice to develop (as it has done in other areas of non-pecuniary loss) so that a standard level for this type of award gradually becomes established.

Finally, it should be noted that the award for loss of amenity is most likely to arise in non-business contracts. There seems little doubt that if the swimming pool in Ruxley Electronics had been built for a developer who was going to sell the property once it was completed, then no damages at all would have been recoverable for the failure to build it to the specified depth.

Reliance interest

In some situations, it may not be easy for the claimant to calculate the profits that would have been made. Here it may prove more sensible to abandon the attempt, and instead to seek recovery of the expenditure which has been incurred in anticipation of the contract. This is what is referred to as the 'reliance' interest. The result of this type of award is that the claimant is put back to the position prior to the contract being made, rather than in the position if the contract had been performed properly.

An example of this type of situation is Anglia Television Ltd v Reed. Reed was an actor who was under contract to play a leading role in a television film. At a late stage, Reed withdrew, and the project was unable to go ahead. In suing Reed for breach of contract, Anglia did not seek their lost profits. It would have been very difficult to estimate exactly what these would have been, given the uncertainties of the entertainment industry. Instead, they sought, and were awarded, compensation for all the expenses incurred towards setting up the film. This, somewhat surprisingly, included expenditure incurred before the contract with Reed was entered into, provided that these fell within the rule of remoteness. The basis for this was that at the time the contract was entered into the defendant must have been aware of the expenditure that had already taken place, and that therefore this would be wasted if the project collapsed.

The decision as to whether to seek expectation or reliance damages will generally lie with the claimant (as was made clear in Anglia Television Ltd v Reed). There have been examples, however, of the court deciding that reliance is the appropriate measure. This was the case in the Australian case of McRae v Commonwealth Disposals Commission, in relation to the contract to salvage a non-existent ship. In some situations, on the other hand, the court may say that the reliance measure should not be available. This will be the case, for instance, where the difficulty in identifying profits results primarily from the fact that the claimant has made a bad bargain. Thus, in C and P Haulage v Middleton, some of the plaintiff's costs were in fact reduced as a result of the breach, and the plaintiff's loss of equipment (which had to be handed over to the defendant) was an integral part of the original contract. In that situation, the plaintiff was only allowed to sue for the expectation interest. The burden of proving that the bargain was 'bad' in this sense falls, however, on the defendant. The claimant does not have to prove that sufficient profit would have been made on the contract to cover the expenses incurred.

Although in general a choice must be made as to which measure of damages is being sought, in certain circumstances it may be possible to recover both expectation and reliance losses, as long as this does not lead to double recovery. Thus, in Naughton v O'Callaghan, which concerned a racehorse which turned out not to have the pedigree contracted for, the buyer recovered the difference in value resulting from this breach (expectation loss) and the costs of training and stabling (reliance loss). Where lost profits are claimed, however, it is only if net profits are claimed that reliance damages may also be available. If gross profits are recovered, the claimant cannot also recover the money that would have been spent in generating these profits. In the case of Cullinane v British 'Rema' Manufacturing Co Ltd, there appears to have been some confusion between gross and net profits, and the case is sometimes cited as authority for the proposition that expectation and reliance damages can never be recovered together. It is submitted, however, that the better view is that outlined above, which distinguishes between gross and net profits.

Restitution

'Restitution' in relation to contract damages traditionally refers to the return of money paid, such 'damages' being largely a corollary of termination following a repudiatory breach. If such a breach has been accepted, and the claimant has returned any benefits received, or is willing to do so, then he or she will also be entitled to claim the restitution of anything which has been given to the defendant. The easiest example is the situation of defective goods. The buyer returns the goods and expects the refund of the price. In many situations, and in particular in relation to consumer contracts, that may be all that can be recovered by way of damages. The buyer may not have been expecting to make a profit out of the use or resale of the goods, and there may be no other losses resulting from the breach. In appropriate circumstances, however, it is possible to combine a claim for restitution with one for the reliance or expectation damages. In Millar Machinery Co Ltd v David Way & Son, the plaintiff recovered all three. The contract involved the purchase of a machine which proved to be defective on delivery and was rejected. The disappointed buyer had spent money on installation costs, and had lost profits from the use of the machine. He was able to recover the price (restitution), the installation costs (reliance) and the lost profits (expectation).

Restitution also has a more general role to play in relation to contracts which are void, or rescinded (for example, for mistake or misrepresentation), or where no contract has ever come into existence. These situations are not ones which arise on breach, and so are not discussed further here.

There is, however, another meaning to 'restitution', which refers to the rectification of a situation which has led to the 'unjust enrichment' of a party. Contract damages have not traditionally been awarded on this measure, and the idea that there could be recovery not only for the claimant's loss, but also for the defendant's gain, was specifically rejected by the Court of Appeal in Surrey CC v Bredero Homes Ltd. Here a developer deliberately built more houses on a piece of land than it was entitled to under its contract with the local authority from which the land was acquired. The Court of Appeal held that the damages would only be nominal because the local authority had suffered no loss. The case of Attorney General v Blake has, however, re-opened this issue. The case concerned the notorious spy George Blake, who had been a member of the British secret services. He was convicted in 1961 of spying for Russia and sentenced to a total of 42 years' imprisonment. In 1966, he escaped and fled to Moscow where he continues to live. While there, he wrote his autobiography, which was published in 1990. The book included descriptions of his life as a member of the secret services. He was to be paid £50,000 on the signing of the contract, £50,000 on the delivery of the manuscript and £50,000 on publication. At the time of the legal action, £90,000 remained payable by the publishers. The Attorney General brought an action to prevent Blake receiving any further benefit from the book. The Court of Appeal held that the Attorney General could succeed in that in his role as guardian of the public interest, he could obtain an injunction to prevent a person benefiting from criminal activity (the disclosures made by Blake in the book amounting to offences under the Official Secrets Act 1989). However, the court in addition considered the situation as regards contract law. Blake was in breach of contract, since when he joined the secret service he undertook a lifelong contractual obligation not to disclose anything about his work. The problem was to establish any loss for which compensation could be awarded to the Crown. If no such loss existed, then the damages could only be nominal. The Court of Appeal, however, felt that although the Attorney General at that stage had declined to argue the point, this was a situation where an exception to the general compensatory rule might be made. It suggested that the law was 'now sufficiently mature to recognise a restitutionary claim for profits made from a breach of contract in appropriate circumstances'. What are the 'appropriate circumstances'? The Court of Appeal suggested two. First, in relation to 'skimped performance':

This is where the defendant fails to provide the full extent of the services which he has contracted to provide and for which he has charged the plaintiff.

The example given is of a fire service which did not provide the contracted number of firemen, horses, or length of hosepipe. The fire service had saved expenses, but had not failed to put out any fires. Nevertheless, it was suggested by Lord Woolf that it would be just to allow the other contracting party to recover damages based on the amount which the fire service had saved by this 'skimped' performance. The second situation in which the court suggested that restitutionary damages might be appropriate is where the defendant has obtained a profit 'by doing the very thing which he contracted not to do'. This was exactly Blake's situation. He had promised not to disclose information about his work, but this was precisely what he had done in writing and publishing the book. It is clear that, had the Attorney General pursued this issue, the Court of Appeal would have been prepared to award damages for breach of contract on this basis. It reconciled with that taken in Surrey CC v Bredero Homes Ltd on the basis that that decision should be regarded as allowing restitutionary damages to be available in exceptional cases.

When the case reached the House of Lords, the contractual basis of the claim was fully argued. The House reached the same effective result as the Court of Appeal by rejecting the public law claim, but allowing the Attorney General to recover the money due to Blake on the basis of breach of contract. Lord Nicholls, who delivered the main speech on behalf of the majority, found support for such an approach in a first instance decision which preceded Surrey v Bredero Homes, but was approved in it, namely Wrotham Park Estate Co Ltd v Parkside Homes Ltd. In this case houses had been built on land in breach of a restrictive covenant, and the plaintiff sought an injunction which would have led to their demolition. The court was reluctant, 'for social and economic reasons', to grant such an injunction. Instead the judge awarded damages based on an estimate of the cost of obtaining a release from the restrictive covenant. This he valued at 5% of the profit which the defendants had made on the development. This decision is difficult to reconcile with Surrey v Bredero, though it is true that in the latter case no injunction was sought, so that the earlier case may be thought to be based on the power to award damages in lieu of an injunction. This analysis was not accepted by the Court of Appeal, however, in Jaggard v Sawyer. Moreover, the House of Lords in Johnson v Agnew has clearly held that the damages awarded in relation to a breach of contract should be the same whether awarded in equity (as would be the case if given in substitution for an equitable remedy such as an injunction) or under common law. In Blake, Lord Nicholls did not attempt to achieve a reconciliation of these issues. His conclusion was simply that 'in so far as the Bredero Homes Ltd decision is inconsistent with the approach adopted in the Wrotham Park case, the latter approach is to be preferred'. He went on to declare that Wrotham Park stood as a 'solitary beacon' showing that contract damages are not always confined to the recovery of financial losses. Damages on the Wrotham Park basis were not, however, what the Attorney General was seeking in Blake. He was not asking for a sum by which Blake could have bought his release from the restrictive provision in his contract of employment; on the facts the Crown would not have agreed to such a release on any terms. The Attorney General was, therefore, seeking a full 'account of profits' made by Blake from the breach. Lord Nicholls, despite the assistance of counsel, was unable to find any cases where the courts have made such an order in a contract case, but noted that there is a 'light sprinkling' of cases where an order to the same effect as an account of profits has been made, but not with that label. From here he jumped to the somewhat surprising general conclusion that 'there seems to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for breach of contract'. Having opened this box, however, the difficulty is to find a way to keep the remedy within bounds, and in particular to avoid it disrupting the normal expectations of commercial contracts. Lord Nicholls' response to this is to state that the remedy of an account of profits will only be available 'in exceptional circumstances'. What then will constitute exceptional circumstances? On this question Lord Nicholls' speech is unhelpfully vague. It seems that exceptional cases will arise where normal damages are 'inadequate', and that all the circumstances must be taken into account. Beyond this, however, the only guidance given is that a relevant question is 'whether the [claimant] had a legitimate interest in preventing the defendant's profit-making activity and, hence, in depriving him of his profit'. The problem with this is that it is capable of a very broad or a very narrow interpretation: in one sense the claimant will always have a legitimate interest' in preventing a breach of contract, and thus preventing the defendant's consequent profit-making activity; in the narrow sense, this will only arise where the claimant has a non-commercial interest in preventing the actions which constitute the breach. It is to be suspected that the latter is what Lord Nicholls means, but the language used does not make this clear. On the facts of Blake, the case was 'exceptional', and art account of profits appropriate, because 'the Crown had and has a legitimate interest in preventing Blake profiting from the disclosure of official information, whether classified or not, while a member of the service or thereafter'. Moreover, the obligation being broken was 'closely akin to a fiduciary obligation, where an account of profits is a standard remedy in the event of breach'.

It remains to be seen whether Blake will turn out to be a major development in the law relating to damages for breach of contract, or simply an interesting, but anomalous, sidenote. The decision has been the subject of severe criticism, and it is difficult not to have sympathy with Lord Hobhouse's dissenting view that the majority had departed from principle in order to stop Blake benefiting from 'his past deplorable criminal conduct'. If that is true, the effect of the case should be regarded as being limited by its own particular and exceptional facts, and therefore not indicating a new path for the development of restitutionary, as opposed to compensatory, damages for breach of contract.

Subsequent case law is so far equivocal as to how far courts will find situations sufficiently 'exceptional' to justify using the Blake approach. In Esso Petroleum Co Ltd v Niad Ltd, the breach of contract was committed by a petrol station which failed to pass on discounts given to it by its supplier to its customers. It would clearly be difficult for the supplier in this situation to prove its loss on an expectation measure. The judge at first instance, however, thought that there were two other bases on which the supplier might recover.

First, he suggested that there could be an account of profits derived from the defendant's breach of contract. The judge referred to the fact that in Attorney General v Blake, such a remedy was regarded as 'exceptional'. Nevertheless, he thought that this case was exceptional because:

(a) damages were an inadequate remedy;

(b) the obligation to implement and maintain recommended pump prices was fundamental to the contract;

(c) the defendant's breach was much more extensive than previously thought, and continued after it had been pointed out;

(d) the supplier had a legitimate interest in preventing the defendant from profiting from its breach of obligation.

This appears to be adopting a very broad approach to exceptional circumstances. Many of these factors would apply to many commercial disputes, and it is difficult to see them as rendering the case 'exceptional' in the way that Attorney General v Blake was exceptional.

The other possible remedy which the judge suggested was the 'restitutionary' remedy of requiring the defendant to pay back to the supplier the amount by which the actual prices charged to customers exceeded the recommended prices. The judge cited no authority in support of such a course, but it might be thought also to follow from Attorney General v Blake. Once again, however, the problem is whether this case was truly 'exceptional', thus justifying such a departure from the normal approach to compensatory damages.

It is to be hoped that this case is not an example of a trend towards extensive use of the Blake 'exception', which it seems unlikely that the House of Lords intended should apply to straightforward commercial disputes.

The second case to consider Blake is a Court of Appeal decision, Experience Hendrix LLC v PPX Enterprises. The dispute arose out of a settlement of an earlier case between the parties, under which the defendant had agreed not to grant further licences in relation to recordings made by the guitarist Jimi Hendrix. The defendant did issue such licences and the claimant sought compensation. The judge at first instance granted an injunction but no compensation. The Court of Appeal considered whether it would be appropriate in this case to award an account of profits, on the basis of Blake. It decided, however, that this was not an 'exceptional' case within the meaning of Blake. In particular, Mance LJ pointed out that:

We are not concerned with a subject anything like as special or sensitive as national security. The State's special interest in preventing a spy benefiting by breaches of his contractual duty of secrecy, and so removing at least part of the financial attraction of such breaches, has no parallel in this case. Secondly, the notoriety which accounted for the magnitude of Blake's royalty earning capacity derived from his prior breaches of secrecy, and that too has no present parallel. Thirdly, there is no direct analogy between [the defendant's] position and that of a fiduciary.

This approach seems much more satisfactory than that adopted in the Niad case (to which the Court of Appeal in Hendrix referred, but without expressing a view on its correctness or otherwise).

The Court of Appeal did, however, hold that damages were recoverable on a different basis. This they did by drawing on the decision in Wrotham Park Estate Ltd v Parkside Homes Ltd, and holding that the plaintiff could recover a sum which it might have demanded from the defendant as the price of relaxing the terms of the previous settlement and allowing the defendant to issue the licences.

In terms of academic commentary on Blake, there is further interesting and critical discussion of the implications of this decision by Campbell and Harris (2002). They argue that the implication of the Blake decision is that all breaches should be penalised. This, they say, is misguided, because not all breaches are 'wrongs' which should be deterred:

Breach has a positive, indeed essential, role in the operation of the law of contract as the legal institution regulating economic exchange and pursuit of its general prevention is inconsistent with the operation of a market economy.

A response to Campbell and Harris is to be found in Jaffey (2002), who argues that a general rule which only 'punishes' non-performance where losses are caused to the other party, and an exceptional rule punishing non-performance itself (as in Blake) can both be accommodated within a particular version of the 'reliance' theory of contract. Under this theory, parties contract on the basis of 'assumptions of responsibility for reliance' by the other party. Generally, such reliance, if disappointed, can be compensated by ensuring that the innocent party is not 'worse off' as a result of having entered into the contract. In exceptional cases, however, reliance can only be compensated by actual performance - for example, where the contractual obligation is not to disclose confidential information. In such cases:

Non-performance is wrongful, and performance should be compelled by order of specific performance if possible, and if not the law should respond with disgorgement or even punitive damages.

Jaffey sees his reliance-based approach as capable of accommodating both the general economic arguments of Campbell and Harris relating to 'efficient breach' and the possibility of restitutionary remedies in exceptional cases, such as Blake.

Consequential losses

There are some losses which flow from the breach, but which cannot be put into the category of 'expenses' (that is, reliance) or thwarted[U1] expectations. Provided the causal link can be established, and they are not too remote[U2], then they will be recoverable. If there is a contract for the purchase of a piece of machinery, for example, and it is defective, then the expectation interest may allow the recovery of lost profits that would have been gained by using the machine. If, however, the defect causes the machine to explode, which results in damage to the buyer's premises, or personal injury to the buyer, compensation in relation to these consequential losses can also be recovered.

6.3.5 Supervening [U3] events

The issue of the measure of damages when supervening events have increased the claimant's loss was considered by the Court of Appeal in Beoco Ltd v Alfa Laval. The first defendants had installed a heat exchanger at the plaintiffs' works. A leak was discovered, and a repair attempted by the second defendants. The plaintiffs put the heat exchanger back in use without carrying out proper tests. In fact, the defects in the exchanger were more extensive than had been realised, and shortly afterwards it exploded. The plaintiffs sought to recover from the first defendants an amount relating to the loss of profits they would have suffered as a result of the need to further repair or replace the exchanger had it not exploded. Their action was based on the defendants' breach of contract in their initially having supplied a defective exchanger. The Court of Appeal held that the measure of damages for hypothetical losses should be the same in contract as in tort. Thus, where a supervening event causes greater damage than the original breach or contract, the claimant cannot recover losses which would have been suffered had the event not occurred. Since the explosion was caused by the negligence of the plaintiffs employees, they could not recover the lost profits which they might otherwise have suffered as a result of the first defendants' breach of contract. This conclusion is out of line with the normal approach to the assessment of contractual damages, which requires the issues to be looked at in the light of the parties' knowledge at the time of the contract. This is the way in which the question of 'remoteness' is dealt with. Taking account of later events, as in this case, means that they may well have the effect of reducing the defendants' liability. If, however, the event does not occur until after the damages have been assessed, then this will not apply. Thus, if in this case the explosion had not occurred until after trial, the plaintiffs would probably have been able to claim the lost profits they were seeking. This runs the risk of making the assessment of damages dependent on rather arbitrary factors, such as when exactly a particular event occurs.

A different approach to a particular type of supervening event was taken by the House of Lords in South Australia Asset Management Corp v York Montague Ltd. This was concerned with cases where there has been a negligent overvaluation of a property which has been used as security of a loan. The question at issue is to what extent should the negligent valuer be liable for the fact that the property has reduced in value because of a fall in the market. Suppose, for example, that the property is valued at £15 million when its true value is £10 million. The lender lends £12 million. When the borrower defaults, the property is sold but, because of a fall in market values, only realises £5 million. Should the valuer be liable for the full loss which the lender has suffered (that is, £7 million) or only the difference between the valuation and the actual value at the time of the contract (£5 million)? The House of Lords took the view that the valuer should only be liable for those losses which are properly attributable to having given wrong information. It held that the lender's loss in this situation is having less security for the loan than was thought. The correct measure of damages is therefore the difference between the actual and true valuations - in the example given above, £5 million. The decision, which reversed the judgment of the Court of Appeal, is not uncontroversial. There is some strength in the Court of Appeal's view that if the valuer had given correct information, the lender would not have entered into the transaction at all, and that therefore the full losses should be recoverable. The House of Lords has, however, settled this issue for the time being.

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