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 they would have been in had the contract been properly performed.
In some instances a contract may specify how much the damages are for a breach of the contract - see Penalty Clauses below. In other cases, unless the parties are able to agree about the quantum of damages, 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. They 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 that 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:
The party claiming damages must keep their loss to a minimum (called mitigating their loss).
Penalty Clauses
In some instances, the parties to a contract may agree in advance on the amount of damages that must be paid if either breaches the contract. If the agreed amount represents a genuine estimate of the likely loss, the courts will enforce the clause. The agreed amount must be paid even if the real loss is more or less than that.
However, if the amount specified in the contract is not a genuine estimate of the value of the loss, but is only a threat to make the other party perform the contract (that is, a penalty), it will not apply. Instead, the court will work out the actual value of the loss that must be paid.
Disputes often occur about whether the amount stated in the contract is a penalty or a genuine estimate. The court uses the following principles in working this out:
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