The party in breach of contract can be ordered to compensate the innocent party for losses caused by the breach. Damages are awarded to put the innocent party in the position she or he would have been in had the contract been properly performed. For example, the party in breach may be ordered to reimburse money the claimant has had to pay as a result of the breach and possibly profits that would have been made had the contract been properly performed.
Usually a contract does not say how much the damages will be. In that case, unless the parties are able to agree about it, it is up to the court to decide. The party claiming damages must prove to the court the amount of the loss and the fact that the loss was caused by the breach. He or she must also prove that the loss is reasonably closely linked to the breach (that is, it is not 'too remote').
The court considers whether the loss is too remote, by looking at the term breached and at the loss that has, in fact, been caused. The court then asks whether the party in breach should have realised at the time of contracting that that sort of loss (if not its extent) was reasonably likely to result if that particular term were breached.
In general, courts have decided that the kinds of losses that a party in breach should have expected to result are:
- losses that would normally result, in this sort of situation, from breach of this sort of term
- any special losses that the party in breach should have realised were likely to arise in this particular case.
The person in breach can also be made to pay compensation for losses if, at the time of contracting, it was made clear that the loss might occur in the circumstances of this particular case.
The party claiming damages must keep their loss to a minimum (called 'mitigating' the loss). They cannot just sit back and do nothing about the loss, expecting compensation. For example, if the contract is for the hire of equipment, and similar equipment can be hired elsewhere to do the job, this equipment should be hired and the hire fees claimed as damages. Or for example, if a tenant leaves early, in breach of a fixed term lease, the landlord should do their best to find another tenant as soon as possible. They will not be able to claim for losses they could reasonably have prevented.
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