What damages will I get?

Going to court is an expensive business. Naturally, before embarking upon full scale litigation, one of the key factors to consider is what damages the court may award, if the action is successful.  For breach of contract actions the essential rule of thumb is that the innocent party will get what are known as expectation damages.  These are the damages that put the innocent party in the position they would have been had the contract been properly performed.  This dates back to an old case, Robinson v. Harman (1848) 1 Ex Rep 850, where Baron Parke, one of the judges sitting on the case, said:

“the rule of the common law is, that were a party sustains loss by reason of a breach of contract, he is, so far as money can do it to, to be placed in the same situation, with respect to damages, as if the contract had been performed” (at 855)

However, the innocent party can alternatively claim what are known as reliance damages.  These are the damages awarded to an innocent party to compensate for the economic harm suffered by the innocent party because it acted in reliance on the defaulting party fulfilling the contract.  Case law to date has suggested that an innocent party must elect which type of damages it wishes to claim (Cullinane v. British Rema Manufacturing [1954] 1 QB 292).  There is a question about whether that innocent party can claim reliance damages, where these put the party in a better position than would have been the case if the contract had been performed.

This question has been answered in a recent case, Omak Maritime Ltd v. Mamola Challenger Shipping Co & Ors [2010] EWHC 2026 (Commm).

The case involved a dispute about a charter of the vessel MV Mamola Challenger (pictured above).  Mamola Challenger Shipping Co, the ship owners, chartered the ship for 5 years to Omak Maritime.  Under the terms of the charterparty (the traditional name for a maritime charter agreement) the owners had to make some modifications to the ship before delivery, including the installation of a new crane.  The intention of the charterer was to sub-charter the vessel to a Nigerian company under terms of a sub-charterparty that had to be approved by a third party.  This approval was not forthcoming, so the charterer tried to walk away from the charterparty.  What complicated the assessment of damages was that the rate of hire under the charterparty was US$13,700 a day.  However, the market rate of hire at the time the charterer walked away (in contract law terms, repudiated the contract) was US$21,347.  The owners were therefore potentially in a better position as a result of the repudiation by the charterparty.

The owners still went on to claim more than $675,000 as reliance damages, but included within these damages were the loss of profit suffered by the owner by keeping the vessel available to perform the charterparty until it was clear the charterer had repudiated it.  Based upon the market rate for hire, this amounted to over US$448,300.  At a London Maritime Arbitration Association tribunal the owners were awarded US$86,534 only, as the tribunal did not accept that a claim for wasted expenses (reliance damages) could be mixed with a claim for loss of profits (normally an expectation damage, but calculated at the charterparty rate).  The charterer appealed on a point of law, that the tribunal had made an error in applying the law of contract with respect to damages.  As the owners had suffered no loss, the charterer claimed that they were not entitled to any damages.

The charterer was successful; the tribunal award was set aside.

Mr Justice Teare decided, after a careful analysis of the relevant case law and other common law authorities, that reliance losses are not a separate, fundamentally-different type of losses that are awarded on a different juridical basis of claim from expectation losses.  Instead, he determined that reliance losses are a species of expectation losses.  He therefore applied the principle of Robinson v. Harman to the claimed reliance losses.  In doing so, he acknowledged that he was going against the opinion of Professor Treitel, who is arguably the leading academic for English contract law and author of the main textbook The Law of Contract.  Professor Treitel believes that reliance losses are essentially different (and inconsistent with the principle of Robinson v. Harman) as an award of damages on a reliance basis is intended to put the claimant in the position he would have been had the contract not been made.

This is an important decision, albeit at first instance, as it is currently the leading authority that claimants cannot use reliance-based damages to be put in a better position than they would have been if the contract had been performed.

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