Lloyd's Maritime and Commercial Law Quarterly
LOSS OF BARGAIN DAMAGES
Edwin Peel *
This paper assesses the circumstances in which damages may be awarded for “loss of bargain” upon termination of a contract for breach. In particular, it considers the extent to which such damages are, and should be, available for “breach of condition”. The central argument is that, in such cases, they are based on the agreement of the parties and, provided such agreement is clearly established, it should be enforced by the courts.
I. INTRODUCTION
It is axiomatic that any breach of contract entitles the claimant to an award of damages to compensate for loss which arises as a result of the breach. What is different about so-called “loss of bargain” damages is that they are awarded for a breach, or breaches, which will never in fact be committed. By way of introduction, a simple hypothetical example will suffice. C and D enter into a contract for an initial term of five years under which C provides D with a service. D is to pay a monthly fee to C. A year into the contract D fails to pay successive monthly instalments and C terminates the contract. What does C recover in damages? He is certainly entitled to any loss flowing from not having received the three instalments.1 If he is entitled to loss of bargain damages, C will also recover what is necessary to put him in the same position as if the remainder of the contract had run its full course. This will amount to the recovery of all future instalments, less the costs C would have incurred to fulfil his obligations. There may need to be an adjustment for interest2 and C will be under a duty to mitigate; having been released from the contract with D, he must take reasonable steps to secure a substitute contract in the market. As the reference to the recovery of “future” instalments indicates, loss of bargain damages are assessed on an anticipatory basis. According to Lord Diplock:3
“Where [C elects to terminate] (a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their
* Professor of Law, University of Oxford; Clarendon Harris Fellow & Tutor in Law, Keble College; Barrister, One Essex Court. This paper is based on a lecture delivered to COMBAR. I am grateful for the comments made on that occasion and for the further comments on a draft of this paper by the anonymous reviewer. The responsibility for any errors in which I may have persisted lies with me.
1. This is D’s “general secondary obligation” in the analysis by Lord Diplock referred to below. C might bring an action for the price, rather than claim damages.
2. In C’s favour where payment is delayed; in D’s favour, by way of a discount, if C benefits from accelerated receipt.
3. Photo Production Ltd v Securicor Transport Ltd [1980] 1 Lloyd’s Rep 545, 553; [1980] AC 827, 849 (emphasis added).
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