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If you enter into a contract with another party, and they do not undertake part of the agreement, then they may be in breach of the contract. If you suffer indirect or direct losses as a result of their actions, you may be entitled to compensation (damages). However, the wrongdoer may not be obliged to fully compensate you for your financial loss. This article explains the factors that limit the damages (compensation) you may receive for a wrongdoer’s breach of contract.

Assessing Total Damages

To help assess what damages are owed to you, there are a number of questions you should consider, such as:

  • Can I clearly identify a financial loss as a result of the wrongdoer’s actions that I should be compensated for?
  • Did I provide money or a benefit to the wrongdoer for which I have not been remunerated?
  • Do I deserve to be compensated solely for the fact that the contract was breached?
  • Did I expect to receive money or some benefit from the wrongdoer?
  • Did I rely on the wrongdoer’s promise to my own financial detriment?

The damages a court awards during a dispute depend on the factual circumstances surrounding the breach of contract. Courts will usually calculate the damages at the date the breach of contract occurred. However, this is up to the court’s discretion and can be varied.

For example, you paid a supplier to bring you stock as part of your contract. One week they did not bring you supplies, but they still charged you. You claim that you deserve a refund for this breach of contract, and seek compensation in the form of damages.

Limiting Awarded Damages

There are three key factors that may limit the damages awarded to you. These are:

  • causation;
  • remoteness; and
  • mitigation of loss.

1. Causation

In order to be compensated for your losses, you need to be able to demonstrate that they were directly caused by the wrongdoer’s actions (or inaction). This is known as causation.

For example, you own a shop, and have a contract with your supplier to bring your weekly refrigerated stock to sell to customers. One day, the supplier’s fridge is faulty and the stock they bring you only lasts two days. The supplier could not replace it, so you had to go out and by more expensive stock from a different vendor, causing a financial loss. If you can show that your supplier’s failure to fix their fridge and fulfil their obligations caused your loss, you may be awarded damages for this loss, if your contract is sufficiently clear.

However, the circumstances in which these disputes arise are rarely so straightforward. The wrongdoer’s conduct may be one of several factors that contributed to your loss. If the wrongdoer can demonstrate that these other factors are separate and independent of their actions, then this weakens the relationship between the breach of contract and your loss.

A court will weigh up all these factors to determine what, if any, damages you should be awarded.

2. Remoteness

If the financial loss you suffer is sufficiently unrelated to and distanced from the wrongdoer’s conduct, this is known as remoteness. Remoteness can limit the damages awarded to you.

Circumstances in which a loss may not be regarded as remote include:

  • the loss arising naturally as a result of a usual series of events; or
  • you and the wrongdoer predicting the loss occurring when making the agreement.

The question of remoteness is determined on a case by case basis. As breaches of contract usually differ in some way, the limitation of damages for remoteness can result in unique circumstances.

For example, while visiting the other vendor to get replacement supplies, you leave your shop assistant in charge. The shop assistant gets distracted by social media and leaves the back door unlocked. Someone steals valuable business equipment. The financial loss of the computer equipment, on face value, seems quite distant from the wrongdoer’s failure to refrigerate products. The remoteness of the loss and conduct could be a limiting factor in damages you could claim.

3. Mitigation of Loss

The third factor that can limit compensation for your loss relates to steps that you could have taken to minimise (mitigate) your financial loss. This is an opportunity for the wrongdoer to show that although they caused a loss, you failed to take steps to prevent or reduce the loss that you should have taken.

It is important to note that generally there is no obligation on you to mitigate your losses unless the contract clearly states you must. However, if you acted unreasonably in the circumstances (factually determined by a court), then this could count against you.

For example, at the same shop, you have a backup supply that you could have used to partially replace some of the lost stock. This backup was intended for this specific circumstance. You decided not to use it and instead go to the more expensive product purely so your supplier can compensate you. If this was an unreasonable thing to do, then an argument could potentially be made regarding your failure to mitigate losses.

Key Takeaways

Before deciding whether you can claim compensation for your commercial losses, you should consider whether:

  1. the wrongdoer sufficiently caused your losses;
  2. you suffered losses that were too remote from the wrongdoer’s conduct; and
  3. you failed to take steps to minimise or prevent these losses.

If you have any questions about the limitation of awarded damages for a breach of contract, contact LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

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