Damages for Breach of Contract

DAMAGES FOR BREACH OF CONTRACT

OUTLINE

1. Definition of Damages

2. The Limits of Damages Claimable under S. 74

3. Measure of Quantum of Damages

4. Remoteness of Damages

5. Proof of Damage





5. Proof of Damage

DEFINITION

• Damages are monetary compensation for the damage, loss or injury that a party has suffered through a breach of contract.

• Damages for breach of contract are available as of right upon the proof of breach.

• Statutory formula: Ss. 74, 75, & 76 of CA 1950

DEFINITION

• Damages simply means the monetary compensation for the damage, loss or injury suffered through a breach of contract.

• Damages are the consequences of breach of contract.• Damages for breach of contract are available as of

right upon proof of breach.• Statutory formula: Sections 74, 75 & 76 of CA 1950

provides for damages.





5. Proof of Damage

DAMAGES UNDER THE CA 1950

• S. 74 limits a plaintiff’s claim for damages caused by a breach of contract.

• While S. 74(1) provides for damages occasioned in the normal cause of things, S. 74(2) emphasizes that no compensation should be given for any remote and indirect loss or damage sustained.

• S. 74 has two limbs which set the limits of damages claimable.– The First Limb: Imputed knowledge– The Second Limb: Special knowledge

Meaning of Imputed and Special Knowledge

• Imputed Knowledge: When the damage or loss caused to the injured party arose naturally in the usual course of things from the breach.

• Special Knowledge: When the parties to the contract were fully aware at the time when they made the contract that damage or loss is likely to result from the breach.

Origin of S. 74 CA 1950

• Rule in Hadley v. BaxendaleP’s mill stopped functioning as a result of the breakage of a

crankshaft. P engaged the services of D who are carriers to deliver the broken crankshaft to the makers as a pattern for a new one. P only informed D that the crankshaft is a broken one and they are the millers of the mill. D negligently delayed the delivery of the crankshaft. Consequently, P’s mill couldn’t operate for a longer period than expected. They therefore sued for the profit lost as a result of the delay.

Held: P couldn’t recover for the loss or damage.

The First Limb –Imputed Knowledge

• Formula: S. 74 of CA 1950, Illustrations (a) to (h)• Reasonable person is expected to know the ‘ordinary course of

things’ and the kind of loss that is liable as a result from a breach of contract.

• Illustrations (a) to (g) show that the contract-breaker is imputed with the knowledge that prices of goods in the market do fluctuate. Therefore, he bears the responsibility for any difference in the price.

Dato Mohd Anuar bin Embong v. Bank Bumiputra (M) Bhd [1997] 1 MLJ 642

• Bank provided Appellants overdraft facility to finance the purchase and development of a piece of land. A secured the overdraft facility by granting a legal charge over the land in question. Part of the land was compulsorily acquired by the govt. and B released the affected titles to the govt. and the remaining ones to A in 1983 but didn’t discharge the encumbrances on the titles as agreed. In 1987, A requested B to discharge the encumbrances but B failed and A had to abort the sale of land to different purchasers. A sued B for unlawfully withholding the discharge of the encumbrances on the titles.

• Court of Appeal upheld the award of RM5,000 as nominal damages – A suffered no loss of profit arising naturally under the first limb of S. 74(1).

Imputed knowledge – Upon breach, injured party takes other steps and may suffer some losses (b) & (f)

• Bee Chuan Rubber Factory Sdn Bhd v. Loo Sam Moi [1976] 2 MLJ 14

• R sued A for losses suffered as a result of A’s delay in completing R’s house for 4.5 years. R had to find alternative accommodation during the said period at the rate of $100 a month.

• Wan Suleiman FJ awarded the damages claimed by R.• Federal Court upheld the decision. Damages were

recoverable for such a breach within the first limb of S. 74(1) if such expenses were in fact incurred.

Review of Relevant Illustrations

• * Review with students:• Illustrations (c), (e) and (g) where the

contract-breaker is the buyer. • Illustration (h): Goods are normally sold and

services rendered at a profit.

The Second Limb –Special Knowledge

• Formula: S. 74 of CA 1950, Illustrations (i), (j), (l) & (m).

• Contract-breaker knew at the date of the contract the special circumstances of the other party.

• Possession of such knowledge puts the contract-breaker in a position to foresee that a breach in such special circumstances will be likely to cause more loss.

• As a reasonable man, he could foresee that such loss is likely to result from his breach.

Illustration (i): Delay in delivering machine causes factory to be idle incurring loss of profits

• Cheow Toh v. Associated Metal Smelters Ltd [1972] 1 MLJ 171

• A agreed to sell a metal melting furnace to R and undertook that the melting furnace shall have a temperature of not lower than 2,600OF. A failed to fulfill this specs. R claimed A was in breach of a condition of the contract.

• Trial judge granted R’s claim and awarded damages for loss of profits.

• FC upheld the decision and awarded damages to R under the second limb.

Illustration (j): Entering into a Contract with the purpose of fulfilling another contract with a 3rd party

Popular Industries Limited v. Eastern Garment Manufacturing Sdn Bhd [1989] 3 MLJ 360

• P who carry on business in Canada, successfully claimed against the D, who carry on business in Malaysia, for non-delivery of goods alleging loss of profits on resale.

• Joseph Jr. J held that when the buyer is a trader and the seller knew or ought to have known that the buyer bought the goods with a view to resell, the buyer is entitled to his loss of profits on the resale, upon non-delivery of the goods by the seller.

• Though there was damage, P failed to produce sufficient evidence of the amount of loss, so nominal damages were awarded.

DAMAGES UNDER CA 19501. Definition of Damages


3. Measure or Quantum of Damages


5. Proof of Damage

MEASURE OR QUANTUM OF DAMAGES

• Measure or Quantum of Damages is the loss of profits or bargain, which would normally be the difference between the market price and the contract price.

• General Purpose: To give compensation, i.e. to put the plaintiff in as good a position as he would have been had the defendant performed the contract.

• Damages can either be:– General Damages: Damages for Loss of Profits or Bargain– Special Damages: Damages for wasted expenditure

General Damages: Loss of Profits or Bargain

• See Illustration (d) of S. 74 CA 1950.– A contracts to buy B’s iPhone 4S for RM2,000, but breaks

his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the iPhone at the time of the breach of promise.

• Plaintiff must show that he has suffered some loss or damage due to the defendant’s breach of contract.

• Formula: LP = contract price - market price

East Asiatic Co Ltd v. Othman [1966] 2 MLJ 38

• D ordered a motorcar from P but defaulted in taking delivery. P sued D for breach of contract and claimed damages for loss of profits.

• Abdul Aziz J held: P’s loss was the loss of profits or bargain which they would have made if there was no breach, i.e. the difference between the agreed retail price of $6,390 and $4,477.69, the price at which P eventually sold the car.

• Loss of Profits (LP) = $6,390 - $4,477.69 = $1,912.31

Taxation on damages for breach of contract

• In the award of damages for breach of contract, deductions should be made for any sum which the plaintiff would have been liable to pay in taxes.

• The above principle was established in the decision of the House of Lords in British Transport Commission v. Gourley [1956] AC 185.

• But two main conditions must be fulfilled:1. Money for loss of which damages are awarded

would have been subject to tax as income;2. Damages awarded to the plaintiff are not subject to

tax in his hands.

British Transport Commission v. Gourley [1956] AC 185

• The plaintiff was a senior partner in a firm of civil engineers who sustained serious injuries in a railway accident because of the defendant’s negligence.

• The High Court assessed the plaintiff’s loss of actual and prospective earnings at ₤37,720.

• The defendant disputed this, contending that as the plaintiff would have had to pay ₤31,025 in tax on those earnings, he ought only to be compensated for the after tax amount of ₤6,695. ‐

• By a 6 1 majority, the House of Lords held that the ‐plaintiff should be awarded only ₤6,695.

Daishowa (M) Wood Products Sdn Bhd v. Kepong Wood Products Co Sdn Bhd. [1980] 2 MLJ 68, FC

• English principle on Taxation on damages for breach of contract was introduced in Daishowa’s case.

• The appellant agreed for a period of five years to buy all wood chips produced by the respondent. The agreement was renewable at the option of either party giving two months’ notice to the other.

• The trial judge found that the appellant was not entitled to terminate the agreement and awarded damages calculated as the gross amount of lost profit. The appellant contended that the trial judge ought to have deducted tax from the award.

• The Federal Court held that the damages were for the destruction of apparatus (and thus not taxable) because the appellant’s termination caused the respondent’s business to come to an end, and reduced the award.

Non-delivery of Goods Sold

• Normal measure of damages for non-delivery of goods sold is the difference between the market price and the contract price.

• The above rule applies when there is an available market.

Popular Industries Limited v. Eastern Garment Manufacturing Sdn Bhd. [1989] 3 MLJ 360

Held: When the buyer is a trader and the seller knew or ought to have known that the buyer bought the goods with a view to resale, the buyer is entitled to his loss of profits on the resale, upon non-delivery of the goods by the seller.





5. Proof of Damage

REMOTENESS OF DAMAGES

• S. 74(2) CA 1950: No compensation is given for a remote and indirect loss or damage sustained by reason of breach.

• Remoteness of damages is a defense often brought against an allegation of breach of contract.

• The contract-breaker or defendant insists that he does not have knowledge of the special circumstances of the plaintiff under the second limb.

• Illustrations (k), (n), (o), (p), (q), & (r).

Abdul Razak Bin Datuk Abu Samah v Shah Alam Properties SdnBhd And Another Appeal [1999] 2 MLJ 500

• “The object of damages for breach of contract is to place the innocent party in the same position as though the contract had been performed. But, in an action for fraudulent misrepresentation, the object of the law is to place the representee in the position he would have been had he not been induced. Hence, the rule as to remoteness of damage contained in s 74 of the Contracts Act 1950 has no application whatsoever to an action for damages in the tort of deceit”.

Per Gopal Sri Ram JCA (as he then was)

Illustration (k): No knowledge that machine (or goods) bought to perform contract made with 3rd Party

• Dato Mohd Anuar bin Embong v. Bank Bumiputra (M) Bhd• R failed to discharge encumbrances on the titles resulted in

the cancellation of the sale of land by A to different purchasers. Some of the purchasers sued A for breach of contract and A claimed against R for the damage allegedly suffered.

• Court held: Claims against R were too remote.

Illustrations (p) & (q): No knowledge why injured party bought goods

• Contract-breaker claims he has no knowledge why the injured party bought the goods. In such a case, the damage is too remote and the contract-breaker is not liable to pay damages under the Second limb of S. 74.

• But contract-breaker will be liable to pay damages relating to any circumstances of imputed knowledge under the first limb such as fluctuation of prices.

Daishowa (M) Wood Products Sdn Bhd v. Kepong Wood Products Co Sdn Bhd. [1980] 2 MLJ 68, FC

• A agreed for a period of five years to buy all wood chips produced by R. The agreement was renewable at the option of either party giving two months’ notice to the other.

• Due to bad market conditions, A initially took delivery of a reduced amount of wood and later refused to take any delivery from R while stating that they were no longer bound by the terms of contract.

• R sued A for breach of contract and claimed for damages.• The trial judge found that A was not entitled to terminate the

agreement and awarded damages calculated as the gross amount of lost profit. A contended that the trial judge ought to have deducted tax from the award.

• The Federal Court held that the damages were for the destruction of apparatus (and thus not taxable) because A’s termination R’s business to come to an end, and reduced the award.

Illustration (n): No knowledge injured party was in dire need of money

• Lim Foo Yong & Sons Realty Sdn Bhd v. Datuk Eric Taylor [1990] 1 MLJ 168

• A bought shares from R. Part of the purchase price was the title deed of a piece of land owned by R though charged to A. A failed to do so and R alleged that A’s failure caused him to suffer financial losses. R claimed inability to deal with the land as a result of non-discharge of the title deed. In order to overcome some financial difficulties, R’s wife had to sell their matrimonial home that was in her name.

• On appeal, R conceded that land could have been sold as charged land.

• SC dismissed R’s claim and held: No evidence that R tried to sell the land or it could not be sold because of A’s failure to discharge the land. For R to recover damages, A’s breach of contract must cause loss to R and not his wife.

• Illustration (o): No knowledge injured party intends to resell goods

• Illustration (r): No knowledge that delay in transport will cause injured party losses at place of destination

• Heng Hang Khim v. Sineo Enteprise Sdn Bhd [2007] 4 MLJ 471.

Heng Hang Khim v. Sineo Enteprise Sdn Bhd [2007] 4 MLJ 471.

• By the sale and purchase agreement (SPA) entered into between P & D (developer) for the sale and purchase of a condominium in JB, D agreed to sell and the plaintiff agreed to purchase the Condo unit for the purchase price of RM319,000.00.

• Pursuant to the SPA, 20% of the purchase price (aggregating RM63,800.00) had been paid by P to D. The D had breached the SPA by failing to deliver vacant possession of the Condo to the plaintiff at the contractual date. As a result thereof, the plaintiff terminated the SPA. P brought an action against D claiming that SPA has been terminated, refund of 20% purchase price paid as well as damages.

• Court granted P’s claim and awarded general damages. On further appeal, it was held D is liable to repay to P his deposit, with interest and damages. “The recovery of the sum paid as part purchase payment is allowed under s. 74 as compensation for loss or damage caused by breach of a contract.”





5. Proof of Damage

PROOF OF DAMAGE

• Plaintiff who claims damages for breach of contract must produce evidence for the loss suffered as a result of the breach.

• No documentary evidence results in a reasonable evaluation of loss incurred.

• Evidence must be adduced in court to support any reasonable evaluation being proposed to the court.

SEA Housing Corporation Sdn Bhd v. Lee Poh Choo [1982] 1 MLJ 324

• D developer delayed in completing the construction of P’s house. P claimed for loss of use and enjoyment of the house by way of rental caused by D’s delay.

• Without producing any documentary evidence or witnesses, P told the court she only called D’s office and was informed the rental would be $2,500/month.

• Court held: P couldn’t recover as she failed to prove her loss of use and occupation of the house by way of rental. The onus of proof of damages lies on P.

Damages must be pleaded and proven• The plaintiff must plead damages and adduce evidence

to support any claim. • Special damages must be both specifically pleaded and

proved.• Failure to prove substantial damages may lead to the

failure of an action or at best the court may award only nominal damages upon proving that the defendant had broken the contract.

• Nominal damages are only relevant upon the proof of breach of contract.

• Once damage is proved and its amount is not proved sufficiently, the court will award nominal damages.


•P who carry on business in Canada, successfully claimed against the D, who carry on business in Malaysia, for non-delivery of goods alleging loss of profits on resale. • Joseph Jr. J held that when the buyer is a trader and the seller knew or ought to have known that the buyer bought the goods with a view to resell, the buyer is entitled to his loss of profits on the resale, upon non-delivery of the goods by the seller.• Though there was damage, P failed to produce sufficient evidence of the amount of loss, so nominal damages were awarded.•P would have been able to obtain loss of profits suffered had they produced the necessary evidence showing the exact amount of loss.

Claim for Loss of Reputation and Credibility

• General rule: Damages for loss of reputation and credibility is not recoverable under S. 74 CA 1950.

• Exceptions:1. Action against a banker for refusing to pay a customer’s

checque where he has in his hands funds of the customer to meet it;

2. Mismanagement of the advertising of the plaintiff’s business; and

3. Wrongful dismissal of an actor or a literary figure which causes him a loss of future publicity.

CCA Holdings Ltd. v. Palm Resort Bhd. [1998] 4 MLJ 143.

• P were managers of D’s club under a technical assistant and managerial agreement.

• D gave P a notice of termination of the agreement on the ground that the club had not generated an operating profit as required in the agreement.

• P applied for an injunction against D to restrain them from removing them as managers of the club.

• P alleged such termination would have adverse impact on their goodwill and reputation as managers of prestigious club internationally.

• Court held: P did not fall within any of the three exceptions and as such their claim failed.

Mitigation of Damages

• Under the mitigation of damages doctrine, a person who has suffered an injury or loss should take reasonable action, where possible, to avoid additional injury or loss.

• The failure of a plaintiff to take protective steps after suffering an injury or loss can reduce the amount of the plaintiff's recovery.

• The mitigation of damages doctrine is sometimes called minimization of damages or the doctrine of Avoidable Consequences


• Joseph Jr. J observed that the normal measure of damages for non-delivery of goods sold is the difference between the market price and the contract price but this rule applied only when there is an ‘available market’.

• That is, the buyer is able to go out and uy equivalent goods.

Date post:	17-Feb-2017
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Damages for Breach of Contract

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