Damages for breach of contract in land transactions

Most people have an inflated view of the damages to which they are entitled arising from a breach of contract in a land transaction.

In reality, the extent to which a party is entitled to damages will depend on the precise wording of the contract setting out the consequences of a breach. If the contract is silent on the consequences of a breach, the courts will apply a far narrower interpretation of the damages payable than is popularly believed.

The whole concept of damages and other remedies is very complex. This article is a cursory examination of the relevant issues. It is intended to give a flavour of the complexity of this issue. We strongly recommend that parties obtain appropriate advice when preparing to enter contracts in order to avoid unintended losses and other consequences in the case of a breach.

An example of that complexity includes the case of a tenant failing to pay one instalment of rent under a lease. In that circumstance, the landlord may choose to terminate the lease in accordance with its termination provisions. In respect of damages, the landlord might expect to claim the loss of all of the rent it would have received during the term of the lease (less any rent it might obtain from a replacement lease).

However, unless the lease specifically provides that payment of rent is an essential term of the lease, the landlord will only be able to claim damages for the loss under the obligation breached, being that one instalment of unpaid rent.

Without specific contractual provision or other proof that the tenant repudiated the whole contract, which is difficult to establish, the courts will not award “loss of bargain” damages, being the amount of rent lost over the full term of the lease. This is because the landlord has chosen to terminate the lease and forgo the benefit of all of the tenant’s other obligations, which might have been performed.

Parties entering into a contract should consider carefully the consequences of any breach of the contract and take proper advice as to the remedy they wish to apply in each case.  In some cases, damages are not an appropriate remedy and a more appropriate remedy may be termination of the contract.

Damages at law

The general concept of damages is the payment of money to a party for the loss caused by another party’s wrong.  However, the way the courts calculate this compensation differs between torts (such as fraud or negligence) and breaches of contract.

In assessing damages in tort, the courts will aim to put the innocent party (the Claimant) in the position they would have been in had the tort not been committed.  They may also consider exemplary or punitive damages as a means of punishing the breaching party (the Defendant) or aggravated damages as compensation to the Claimant.

By comparison, in assessing damages for a breach of contract, the courts will not look to the Claimant’s original position before it entered into the contract. Rather, they will:

  1. aim to put the Claimant in the position it would be in if the contract (or obligation) had been performed;
  2. take care not to put the Claimant in a better position than it would have been had the contract been performed; and
  3. reject any claim for additional damages comprising punishment of the Defendant.

Contractual provisions for damages

Parties may include in a contract provisions for (among other things):

  1. liquidated damages;
  2. loss of bargain damages; and
  3. consequential damages.

Liquidated damages are specific amounts that the parties agree will apply in the event of a breach of contract.  However, care should be taken to nominate a sum reflecting a genuine pre-estimate of the loss suffered as a result of the breach.  The courts will not award an amount they consider to be so great as to be an unenforceable penalty and may substitute a nominal sum.

In order to claim loss of bargain damages, the Claimant must show that the term breached was an essential term or that a party repudiated the contract.  Contractual provisions supporting such establishment include those providing that:

  1. specific obligations of the parties under the contract are essential terms;
  2. any breach of those specific terms is to be deemed a repudiation of the contract; and
  3. time is of the essence (thereby making breaches triggering termination provisions serious breaches for which loss of bargain damages could be claimed).

In respect of consequential damages, under common law, the Claimant is entitled to damages for losses that may reasonably be considered to arise naturally from the breach.  For example, in the case of a breach of a lease, the Claimant landlord may claim the difference between the rent payable under the lease and any lesser rent obtained from a replacement lessee or for losses resulting from an inability to lease the subject property to another party.

However, in order to claim damages for any unusual or exceptional losses, the Claimant must prove that those losses were within the contemplation of the parties at the time of entering the contract.

In the decision of Hadley v Baxendale1, the Claimants were the owners of a flour mill who had contracted with the Defendant to deliver a broken crankshaft to engineers for the purposes of making a new crankshaft.  The delivery was delayed and, as a result, the mill was stopped for 5 days.  The court held that the Defendant was not liable for the Claimants’ lost profit because it did not know that the mill would be stopped and the lost profit was not something it should have contemplated as occurring in the usual course of things.

In order to avoid uncertainty and the burden of proving what was contemplated by the parties on entering the contract, the parties should acknowledge and agree, as far as possible, any potential consequential losses that may be unusual or specific to their transactions and that they wish to be covered for damages in the event of a breach.

Damages not an appropriate remedy

In some cases, damages may not be an appropriate remedy. For example, in the case of a breach of a warranty, the courts will usually award damages to the Claimant for that specific breach.

Where the warranties given are critical to a contract, the Claimant may prefer to terminate the contract altogether. However, it will only be able to do so if the contract provides for termination for such a breach.

Exercising rights to remedy

Parties should take particular care in exercising their rights to remedy.  Failure to follow proper process can produce dire and unintended results.

For example, in the case of Ingram and Knee v Patcroft Properties Limited2, a lease provided the landlord with a right of re-entry where rent money was 14 days overdue.  The landlord retook possession of the premises a day earlier than it was entitled, changing the locks and posting on the entrance notices of re-entry, termination of lease, trespass and distraint.  A year later,  the landlord claimed for damages and more than a year’s unpaid rent.

The court found that the landlord’s premature entry was unlawful, that exclusion of the tenant from the premises constituted a repudiation of the lease by the landlord and that, in the circumstances, it was “entirely justifiable” for the tenant not to make rent payments.

As a result of its miscalculation, the landlord lost a year’s rent and the tenant was awarded costs of $15,000 and its reasonable disbursements.

Lavan comment

The concept of damages and the consequences of a breach are often not given proper consideration by parties when negotiating the terms of a contract. As a result, parties suffer unintended loss and other consequences because the necessary contractual provisions were not included.

Strict rules apply to the calculation of damages payable under contract law and some damages will not be awarded unless they are supported by express contractual provisions.

Parties entering into land-related contracts should consider carefully each risk area in the contract, including the possibility of any consequential losses particular to their transactions, and obtain advice as to how best to minimise that risk. This analysis needs to take into account whether remedies other than damages (such as termination) are more appropriate.

 

03 May 2017
Property Updates
AUTHOR
Peter Beekink
Partner
SERVICES
Property and Leasing


FOOTNOTES

[1] Hadley v Baxendale (1854) 9 Exch 341 [354] ; (1854) 156 ER 145 [151].

[2] Ingram and Knee v Patcroft Properties Limited [2011] NZSC 49.