THE LAW OF DAMAGES FOR CONSTRUCTION CONTRACTS

Carillion JM Ltd v Phi Group Ltd [2011] EWHC 1379 (TCC) At paragraph 168 of his judgment, Akenhead J quoted this summary of the law of damages (‘so far as relevant to that case’) from AXA Insurance UK PLC v Cunningham Lindsey United Kingdom [2007] EWHC 3023 (TCC)

"256. The essential object of an award of damages is to put the innocent claimant "in the same position as he would have been in if he had not sustained the wrong for which he is now getting compensation or reparation" (see Livingstone v Rawyards Coal Company (1880 5 App.Cas 25, 39).

257. Damages for breach of contract "should be such as may fairly and reasonably be considered either (1) arising naturally, i.e. according to the usual course of things from such breach of contract itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of a breach of it" (Hadley v Baxendale (1854) 9 Ex 341, 354). I am only concerned in this case with first limb of Hadley v Baxendale damages. None of the heads of loss in this case are challenged, properly or at all, on the grounds that they fall outside the first limb of Hadley v Baxendale. Whether the quantum and the requisite causation are proved, however, another matter.

258. The question of reasonableness of the loss or damage claimed legitimately arises in a number of different ways. As confirmed in Hadley v Baxendale (in the words quoted above) it is necessary that the damages must "fairly and reasonably be considered" as arising from the breach. That reasonableness is itself an essential element in establishing damages was confirmed in the House of Lords case of Ruxley Electronics Ltd v Forsyth [1995] [UKHL 8]. The judgments of their Lordships contain many references to the importance of reasonableness in selecting the appropriate measure of damages and determining the extent and measure of damages. For instance Lord Lloyd of Berwick says at page 368A and 370A:

"Once again one finds the court emphasising the central importance of reasonableness in selecting the appropriate measure of damages … So I cannot accept that reasonableness is confined to the doctrine of mitigation. It has a wider impact …"

Thus, I conclude that it is generally incumbent upon an innocent claimant entitled to damages to demonstrate not only that the loss was within one of the Hadley v Baxendale limbs but also that it is reasonable to recover damages of the type and extent claimed.

259. Reasonableness as a separate element is to be distinguished from the "duty" to mitigate. That is described in the well-known speech of Viscount Haldane LC in British Westinghouse Co v Underground Railway [1912] AC 673, 689:

"The fundamental basis is thus compensation for pecuniary loss naturally claimed from the breach; but this first principle is qualified by a second, which imposes on a claimant the duty of taking all reasonable steps to

mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps."

The onus of establishing a failure to mitigate is upon the defendant. It is clear from numerous authorities that the duty to mitigate does not impose a heavy onus on a claimant. In almost every case, provided that the claimant can be shown not to have acted unreasonably in all the circumstances, to that extent it will not have failed to mitigate its loss.

260. The duty to mitigate is, generally, not a contractual or statutory duty. For instance Pearson LJ in Darbishire v Warran [1963] 1 WLR 1067 properly said:

"It is important to appreciate the true nature of the so-called 'duty to mitigate the loss' or 'duty to minimise the damage'. The claimant is not under any contractual obligation to adopt the cheaper method: if he wishes to adopt the more expensive method, he is at liberty to do so and by doing so he commits no wrong against the defendant or anyone else. The true meaning is that the claimant is not entitled to charge the defendant by way of damages with any greater sum than that which he reasonably needs to expend for the purpose of making good the loss. In short, he is fully entitled to be as extravagant as he pleases but not at the expense of the defendant."

That dictum has some particular relevance here where, on any count, as it effectively accepts, AXA spent considerably more in resolving the problems at Orchard Farm than was necessary.

261. The costs of and occasioned by reinstatement in a construction context are often, albeit not invariably, the proper measure of damages where there has been defective or negligence performance, particularly where the defaults have caused defects or deficiencies in building (East Ham Corpn v Bernard Sunley & Sons [1966] AC 406). However "where reinstatement is the appropriate basis for the assessment of damages, it must be both reasonable to reinstate and the amount awarded must be objectively fair as between the claimants and the defendants" (per Clarke LJ in the Maersk Colombo [2001] 2 Lloyd's Rep 275, 281).

262. In considering reasonableness, both in the context of mitigation and reasonableness as a basis for establishing damages, the court will not be unsympathetic to the predicament in which an innocent claimant is put by the breaches of contract of the defendant. As Lord MacMillan said in Banco De Portugal v Waterlow & Sons Ltd [1932] AC 452 at page 506:

"Where the sufferer from a breach of contact finds himself in consequence of that breach placed in the position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the costs of such

measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.""

Akenhead J went on to state:

“169 The broad propositions that can be distilled from these cases are:

(a) Damages are awarded to compensate an innocent claimant so as to put it in the same position as it would have been in if he had not sustained the wrong.

(b) Damages for breach of contract must fall within one or other of the two limbs of Hadley v Baxendale.

(c) The innocent claimant must establish that it is reasonable to recover damages of the type and extent claimed.

(d) The burden of proving a failure to mitigate is on the unsuccessful defendant. If the innocent claimant has not acted unreasonably in all the circumstances, particularly examined at the time, there will be no failure to mitigate.

(e) In considering reasonableness or unreasonableness both in the context of a failure to mitigate as well as the reasonableness of the type and extent of damages claim, the Court will not be unsympathetic to the predicament in which the innocent claimant finds itself as a result of the unsuccessful defendant's breaches of contract.”

Further Resources for Construction Professionals:

Designing Buildings Wiki on Expectation Interest and Reliance Expenditure

Atkinson Law Resources on Delay & Disruption

The Author Sarah Fox of Enjoy Legal Learning wrote this note. She is a speaker and trainer who cuts through the complexities of construction law. She provides confidence to construction companies to read, use and understand their contracts. She is also author of the 500 Word Contract™. To find out how Sarah can help you love your terms and conditions, contact her on: 07767 342747 or by email: sarah@enjoylegallearning.co.uk