Developments in contract: contractual damages and hindsight

The principles

• Damages for breach of contract are usually calculated as at the date of the breach.

• Following the decision in The Golden Victory in 2007, this principle can be deviated from where the party in breach can show that subsequent events meant that the loss suffered was less than it appeared on the day of the breach, or that no loss was suffered at all.

• This flexibility is best understood by reference to the “compensatory principle”, whereby the purpose of awarding damages is to put the innocent party in the position they would have been in had the contract been performed.

Recent developments

• In OMV Petrom SA v Glencore International the supplier of a blended oil that was not of the specification contracted for tried unsuccessfully to argue that, as the use of the oil had proved to be unproblematic, no damages should be payable.

• In that case the Court of Appeal held that the price would have been lower had the buyer understood there was a risk of the oil being unsuitable and the seller should not benefit from its failure to perform by achieving a higher price than if it had been honest about what it delivered.

• More recently, in Plantation Holdings v Dubai Islamic Bank, the defendant persuaded the court that damages for wrongful enforcement of security over land should not be calculated on the day of breach, as the security could have been properly enforced shortly afterwards.

• The claimant’s loss was therefore nominal, as the breach did not cause the losses of which it complained. It would have suffered those same losses had the defendant exercised the security three months later when it was entitled to do so.

What this means

• The differing outcomes of these two recent cases highlight the fact that the application of the principle in The Golden Victory can seem somewhat uncertain.

• Damages can be calculated with the benefit of hindsight, rather than as at the day of the breach, but only where it can be shown that the breach did not cause all or part of the loss complained of, which was caused by subsequent events that would have occurred in any event.

• Where a breach of contract occurs, both sides will need to consider what loss truly stems from the breach and what would have been inevitable in the light of subsequent events.

• Where a party has benefitted from its breach, or been less than honest in any way, it seems there is less chance of The Golden Victory principle being applied.