Last edited 17 Sep 2020

Damages in construction contracts


Damages for breach of contract are intended to be compensatory, that is to say, so far as they can, they are intended to place the innocent party in the same position that they would have been in had the other party performed their contractual promises (see British Westinghouse Electric Company Ltd v. Underground Electric Railways).

In contrast, an award of damages in respect of tortious liability is intended to place the innocent party back in the position they were before the breach of the duty. Awards of damages for breach of contract may therefore be greater than awards of damages in tort.

In Muirhead v Industrial Tank Specialists Ltd, M entered into a contract with a third party for the supply of pumps to be used at M's lobster farm. The electric motors for the pumps were supplied by ITS. The motors failed causing the pumps to fail, which resulted in the death of M's lobsters. There was no contract between M and ITS and M brought proceedings in negligence.

M claimed three heads of damage: the value of the dead lobsters; the loss of profits on those lobsters; the loss of profits that would have been earned by M's business had the pumps functioned properly. It was held that M was entitled to recover the first two heads of damage but not the third head of damage. The court considered that the third head of damage might have been recoverable had there been a contract between M and ITS.

Damages may be general damages, which can be assessed in an approximate figure, or special damages, which represent past pecuniary loss and have to be calculated and pleaded with sufficient particularity so as not to take the defendant by surprise at trial. Further, damages may include future damages, that is to say those which it is anticipated are likely to flow from the breach of contract.

Future damages are known as prospective loss and must be claimed at the same time as past or present loss in respect of the same breach of contract (see Conquer v Boot). This rule does not apply to breaches of different promises within the same contract or breaches of recurring obligations; such breaches are considered to give rise to separate causes of action.

Damages for breach of contract (which includes liquidated and ascertained damages) must be distinguished from claims arising under the terms of the contract, for example a claim for direct loss and expense. Such claims are not subject to the general principles on damages set out below. They are however subject to the rules of construction of a contract.

The parties to a contract may agree on the amount of damages to be awarded in the event of a breach of contract. Such damages are known as liquidated and ascertained damages and are commonplace in construction contracts, usually related to the completion obligations of the contractor.

Provided the agreed sum is a genuine pre-estimate of loss and not a penalty, it will be enforced by the courts (see Dunlop Ltd v New Garage Co Ltd). Damages may also include consequential losses. Consequential losses, often referred to as 'economic loss', are losses such as loss of profit, which are not directly related to physical damage (see Muirhead).

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