Lavania & Balan Chambers

When claiming damages for breach of contract, mounting a claim under the ‘expectation’ and ‘reliance’ measures of damages are amongst the most common heads of claim made. These heads of claim are termed Expectation Losses (meant to place a party in a position as if the contract was performed) and Reliance Losses (meant to place a party in a position as if the contract was never executed) respectively. Whilst at first blush it may seem that these heads of claim operate in two separate spheres, in reality, there is a significant interplay between the two which seemingly causes confusion. Part I of this series aims to set out the broad scope of Expectation and Reliance Losses and the varying ways that a claim for such losses may be mounted whilst Part II shall deal with the interplay between these two heads of claim and put into practical context, the manner in which they co-exist.

Damages in Contract

The cornerstone of damages for breach of contract dates back to the 19^th century case of Robinson v Harman^[1] which laid down the principle that an innocent party is to be as far as monetarily possible, be compensated such that he is placed in a position as if the contract had been performed. Naturally, this is subject to the principle that a party ought not to beovercompensated where he would consequently be put in a better financial position than he would have been if the contract was performed. This is what has come to be termed as expectation losses by Courts today.

Many years later, the English Court of Appeal in Anglia Television Ltd v Reed ^[2] expanded on the principles in Robinson where it held that a plaintiff suing for breach of contract could in fact, elect to sue for expectation losses or reliance losses i.e. expenditure incurred by the plaintiff that has been wasted as a result of the breach. Chitty on Contracts suggests that the principle in Anglia Television affords a plaintiff an unfettered discretion to elect between mounting a claim for expectation loss or reliance loss.^[3]

Notwithstanding the salient principles governing the distinct heads of claim for damages in contract law, all claims are subject to the overarching principle set out in Hadley v Baxendale ^[4]. Briefly, this principle consists of two separate limbs; first, that damages recoverable must ordinarily or naturally flow from the breach said to be committed, or second, that damages reasonably within the contemplation of the parties at the time of contracting as a probable result of the breach may be recovered.

Expectation Loss

Expectation losses, or otherwise known as a claim for loss of profits, as stated above, is one that serves to place a plaintiff in the same financial position that he would have been had the contract been performed. An assessment of expectation losses therefore includes an assessment of what a litigant’s profit margin would have been under the contract. The most common cases are typically where a plaintiff has incurred no expenditure towards performance of the contract, particularly one that concerns the sale of goods. For example, say X was to sell 1000kgs of bricks to Y at a contract price of $100,000 and the cost of sourcing the said bricks was $75,000 (a cost which X has not incurred as the bricks have not been sourced). Subject to the necessary evidence being disclosed, X’s profit margin would have been 25%. Therefore, compensation of $25,000 would be awarded to X, being the sum required to place X in a position as if the contract had been performed i.e. where X would have made a profit of $25,000.

Now, say X had in fact incurred the cost $75,000 to source the said bricks, X would now be at a loss of $75,000. Strictly from a numerical standpoint, the sum of $100,000 would need to be awarded to place X at a profit $25,000. However, this would amount to X being overcompensated as X would retain the benefit of having $75,000 stock of bricks effectively at no cost. Therefore, the market price of the bricks would be a consideration that courts would take into account towards offsetting the damages to be awarded to the plaintiff.[5]

The above can be distinguished from a contract concerning the provision of services wherein the work may have been performed by the plaintiff and expenses incurred on amongst others, a time-cost basis. However, due to the failure of the party in breach to perform their obligations, the plaintiff has now been deprived of a means to recoup its expenditure and its profit margin. In such a situation, unlike the above where X may retain a benefit in exchange for expenses incurred, there will be no overcompensation if the plaintiff is awarded compensation for its expenses incurred as well as its profit margin under the contract.^[6] In such situations an apparent conflict arises between expectation and reliance losses (wasted expenditure), an analysis of which will be addressed in the next part of this article.^[7]

Reliance Loss

Whilst a plaintiff has an unfettered discretion to elect whether to pursue a claim for expectation or reliance loss, it is commonplace for reliance losses to be claimed where a contract would not have produced a profit or it is impossible to ascertain what the profit would have been.^[8] In such circumstances, a plaintiff can mount a claim (either primarily or in the alternative^[9]) for expenditure incurred that has been wasted as a result of the defendant’s breach of contract. However, it must be clarified that the burden of evidence rests with the plaintiff in these situations, wherein the plaintiff must adduce adequate and sufficient evidence to prove that such expenditure has actually been incurred. This may be done by way of transaction slips, bank statements, invoices, payment vouchers and other documentary evidence of that sort. A failure to produce such evidence may result in certain claims falling short of the requisite thresholds of proof.

As is evident from the above, the realm of reliance losses is one that poses far less complications as compared to expectation loss. Such areas that do require clarification are areas that are intertwined with expectation loss, such as where the profit margin of a contract is called into question (which will be dealt with in Part II alongside practical limitations of a claim for reliance losses.).

 Conclusion

The principles governing expectation and reliance losses above may seem fairly direct and uncontentious. However, due to the incredibly practical nature of this area of the law, these heads of claim have branched into several varying species of claims in order to adapt to the facts of each peculiar case. In turn, this has given rise to difficulties and impracticalities in this area of the law. An in-depth analysis of these matters will be discussed in Part II of this series.

 

This article is authored by Mavin Thillainathan (Partner) and Amitaesh Thevananthan (Pupil) of the Commercial Litigation Practice of Lavania & Balan Chambers. It contains general information only. The contents are not intended to constitute legal advice on any specific matter nor is it an expression of legal opinion and should not be relied upon as such.