Civil Code (arts. 1152, 1153, 1780) the stipulation of the parties as to the damages to be paid for breach of a stipulation other than for paying a sum of money is binding on the courts. But in England, Scotland and the United States, courts disregard the words used, and inquire into the real nature of the transaction in order to see whether the sum fixed is to be treated as ascertained damage or as a penalty to be held in terrorem over the defaulter, and in the latter case, notwithstanding the stipulation, will require proof of the actual loss. In Kemble v. Farren (1829, 6 Bingham, 141), a contract between a manager and an actor provided that for a breach of any of the stipulations therein, the sum of £1000 should be payable by the defaulter, not as a penalty, but as liquidated and ascertained damages. Yet, the court, observing that under the stipulations of the contract the sum of £1000, if it were taken to be liquidated damages, might become payable for mere non-payment of a trifling sum, held that it was not fixed as damages, but as a penalty only. The case in which an agreed sum is most usually treated as a penalty is a bond to pay a fixed sum containing a condition that it shall be void if certain acts are done or a certain smaller sum paid. Another case is where a single lump sum is fixed as the liquidated amount of damage to be paid for doing or failing to do a number of different things of very varying degrees of importance (Elphinstone v. Monkland Iron Co., 1887, 11 A.C. 333). But the courts have accepted as creating a contractual measure of damage a stipulation to finish sewerage works by a given day (Law v. Redditch Local Board, 1892, 1 Q.B. 127); or to complete torpedo boats within a limited time for a foreign government (Clydebank Engineering Co. v. Yzquierda, 1905, A.C. 6). In this last case the law lords indicated that the provision of an agreed sum was peculiarly appropriate in view of the difficulty of showing the exact damage which a state sustains by non-delivery of a warship. Where the damage is not liquidated or agreed it is assessed to upon evidence as to the actual loss naturally and directly flowing from the breach of contract.
In contracts for the sale of goods the measure of damages is fixed by statute. Where the buyer wrongfully refuses or neglects to accept and pay for, or the seller wrongfully neglects or refuses to deliver the goods, the measure is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s or seller’s breach of contract. Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted or delivered, or if no such time was fixed for acceptance or delivery, then at the time of refusal to accept or deliver (Sale of Goods Act 1893, §§ 50, 51).
Where there is no market, the value is fixed by the price of the nearest available substitute. Where the sufferer, at the request of the person in default, postpones purchase or sale, any increased loss thereby caused falls on the defaulter. If the buyer, before the time fixed for delivery, has resold the goods to a sub-vendor, he cannot claim against his own vendor any damages which the sub-vendor may recover against him for breach of contract, because he ought to have gone into the market and purchased other goods. But this is subject to modification in cases falling within the rule in Hadley v. Baxendale (1854, 9 Exchequer, 341). But trouble and expense incurred by the seller of finding a new purchaser or other goods may be taken account of in assessing the damages.
Where the goods delivered are not as contracted the buyer may as a rule sue the seller for a breach of warranty, or set it up as reduction of price. Where the warranty is of quality the loss is prima facie the difference between the value of the goods delivered when delivered and the value which they would have then had if they had answered to the warranty (Sale of Goods Act 1893, § 53). In an American case, where a person had agreed with a boarding-house keeper for a year, and quitted the house within the time, it was held that the measure of damages was not the price stipulated to be paid, but only the loss caused by the breach of contract. In contracts to marry, a special class of considerations is recognized, and the jury in assessing damages will take notice of the conduct of the parties. The social position and means of the defendant may be given in evidence to show what the plaintiff has lost by the breach of contract.
On a breach of contract to replace stock lent, the measure of damages is the price of the stock on the day when it ought to have been delivered, or on the day of trial, at the plaintiff’s option.
In contracts for the sale of realty, the measure of damage for breach by the vendor is the amount of any deposit paid by the would-be purchaser and of the expenses thrown away. But the purchaser may, in a proper case, obtain specific performance, and if he has been cheated may obtain damages in an action for deceit.
Breaches of trust are in a sense distinct from breaches of contract, as they fell under the jurisdiction of courts of equity and not of the common law courts. The rule applied was to require a defaulting trustee to make good to the beneficiaries any loss flowing from a breach of trust and not to allow him to set off against this liability any gain to the trust fund resulting from a different breach of trust or from good management (Lewin on Trusts, ed. 1904, 1146).
In estimating the proper amount to be assessed as damages for a breach of contract, it is not permissible to include every loss caused by the act or default upon which the claim for damages is based. The damage to be awarded must be that fairly and naturally arising from the breach under ordinary circumstances or the special circumstances of the particular contract, or in other words, which may reasonably be supposed to have been in the contemplation of the parties at the time of making the contract. The chief authority for this rule is the case of Hadley v. Baxendale (1854, 9 Exch. 341), which has been accepted in Scotland and the United States and throughout the British empire, and often differs little, if at all, from the rule adopted in the French civil code (art. 1150). In that case damages were sought for the loss of profits caused by a steam mill being kept idle, on account of the delay of the defendants in sending a new shaft which they had contracted to make. The court held the damage to be too remote, and stated the proper rule as follows:—
“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or 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 the breach of it. Now if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from such contract which they would reasonably contemplate would be the amount of injury which would ordinarily flow from a breach of contract under these special circumstances so known and communicated. But on the other hand, if those special circumstances were wholly unknown to the party breaking the contract, he at the most could only be supposed to have had in his mind the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such breach of contract.”[1]
The rule is, however, only a general guide, and does not obviate the necessity of inquiring in each case what are the natural or contemplated damages. In an action by the proprietor of a theatre, it was alleged that the defendant had written a libel on one of the plaintiff’s singers, whereby she was
- ↑ In the Indian Contracts Code (Act xii. of 1872), the rule is thus
summarized:—
“When a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew when they made the contract to be likely to result from the breach of it. Such compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach. . . . In estimating the loss or damage arising from a breach of contract, the means of remedying the inconvenience caused by the non-performance must be taken into account” (§ 73).
