Compensation for Harm to Economic Interests

• Author: Jamie Cassels
• Profession: Professor of Law University of Victoria
• Pages: 15-62

CHAPTER

2

COMPENSATION

FOR

HARM

TO

ECONOMIC

INTERESTS

A.

INTRODUCTION

This chapter canvasses

the

principles

of

recovery

for

harm

to

economic

interests.

It

focuses

primarily upon contract law, since contract

is the

primary means

by

which persons establish economic

rights.

However,

tort

law

also

offers

protection against economic loss.

For

example,

the

action

for

deceit

or

fraud

is of

ancient origin. More recently,

the

protec-

tion

of

economic interests

in

tort

has

been

further

extended through

the

development

of the

tort

of

negligent misrepresentation

and a

cau-

tious expansion

of

recovery

of

economic

losses

caused

by

negligence.

At

one

level

of

generality, there

is no

real

difference

in the way in

which damages

are

calculated

in

contract

and

tort.

Both

are

based

on

the

principle

of

restitutio

in

integrum

—

that

the

plaintiff

is to be

made

whole. This

is

accomplished

by

awarding

a sum of

money that will

put

the

plaintiff

in the

position

as

though

the

wrong

had not

been done.

However,

in

application, this principle works

differently

in

contract

and

tort.

Since contracts create expectations about

the

future,

the

stan-

dard measure

of

recovery

is

expectation damages. Tort

law

protects

interests

in the

present

and the

primary measure

of

damages

is the

reli-

ance

or

restoration measure.

This

chapter considers

the

principles

regarding both measures

of

damages.

15

16

REMEDIES:

THE LAW OF

DAMAGES

B.

BREACH

OF

CONTRACT:

THE

EXPECTATION

MEASURE

1)

Introduction

The

ordinary measure

of

damages

in

actions

for

breach

of

contract

is

the

expectation measure. Expectation damages

are

forward-looking.

They

do not

merely compensate persons

for

positive losses

suffered

as

the

result

of a

wrong,

but

give

to the

plaintiff

the

benefits expected

as a

result

of a

promise. Expectation damages

aim to put the

plaintiff

in the

position

she

would have been

in had the

contract been performed.

In

the

case

of

Wertheim

v.

Chicoutimi

Pulp

Co.,1

for

example,

the

Court

stated:

"[I]t

is the

general intention

of the law

that,

in

giving damages

for

breach

of

contract,

the

party complaining should,

so far as it can be

done

by

money,

be

placed

in the

same position

as he

would have been

in if the

contract

had

been performed."

Expectation

damages

are

designed

to

secure

for the

plaintiff

the

benefit

of the

contract. Most generally, they

can be

calculated

by

deter-

mining

the

difference

between

the

position

that

the

plaintiff

would

have

occupied,

had the

contract

been

performed,

and the

position

that

the

plain-

tiff

is

actually

in as a

result

of

breach

or

non-performance

of

the

contract.

Sometimes,

when there

are no

consequential

or

out-of-pocket

losses

to the

plaintiff

associated with

the

contract,

the

expectation mea-

sure

of

damages will

be

calculated simply

by

reference

to the net

gain

that

the

plaintiff

would have obtained

as a

result

of the

contract.

For

example,

if the

contract

is for the

sale

of

goods

at

$100,

and at the

time

the

defendant

fails

to

deliver

the

goods, they

are

worth $120,

the

expectation damages

are $20 — the net

benefit that would have been

obtained

by the

plaintiff

(assuming that

the

plaintiff

has not

prepaid).

Giving

this

amount

in

damages

will

put the

plaintiff (financially)

in the

same

position

as

though

he had

received

the

goods.

On

other occa-

sions,

a

plaintiff

will have incurred additional consequential

losses

that

must also

be

compensated

if he is to be put in the

position

he

would

have been

in had the

contract been performed.

For

example,

in the

sit-

uation above,

if the

plaintiff

had

arranged

and

paid

for

transportation

for

the

expected goods,

the

damages award would also have

to

include

the

wasted expenditure. Alternatively,

the

plaintiff

may

have been

intending

to use the

goods

for

some profit-making enterprise

and as a

result

of the

breach will have lost

an

opportunity

to

make

a

profit.

The

1

[1911]

A.C.

301 at

307;

see

also

Robinson

v.

Harman

(1848),

1

Ex.D.

850 at

855,

Parke

B.

Compensation

for

Harm

to

Economic Interests

17

extent

to

which these additional consequential losses

are

recoverable

is

discussed

in

greater detail below.

2) Why Are

Expectation Damages

the

Standard Measure

in

Contract

Law?

Much

legal scholarship

has

been devoted

to the

question

of why

con-

tract

law

should protect

the

expectation interest.

It has

been observed

that

the

moral

force

of the

restitution

and

reliance interests

is

much

stronger

and

more widely accepted than

the

expectation

interest.2

The

restitution interest

reflects

the

widely held sentiment that obtaining

a

benefit

by

fraud,

deceit,

or

promise-breaking

is

wrong

and

that

unjustly

acquired gains should

be

disgorged.

The

reliance interest sim-

ilarly

rests upon

a

widely shared moral sentiment that injuries

suffered

by

reason

of a

broken promise

or

misrepresentation

should

be

made

whole; that

if a

person relies upon another

and the

other

fails

to

keep

his

word,

any

losses

suffered

should

be

compensated.

But the

expecta-

tion interest goes much

further

and

grants

to the

plaintiff

compensa-

tion

not

only

for the

loss

suffered

but for the

gain anticipated.

The

plaintiffs

"loss"

is

defined

in

terms

of

something

he or she

never had.

Thus,

it

remains

a

matter

of

considerable interest among legal scholars

why

contract

law

pursues

the

protection

of

expectations

so

relentlessly.

a)

Expectation Damages

in a

Credit Economy: Planning

and

Risk

Allocation

There

is a

lively

historical debate regarding

the

emergence

of

expecta-

tion damages

as the

standard measure

of

damages

in

contract.3

Many

believe that

the

development

was

related

to the

growing prominence

of

executory

contracts (agreements about

the

future)

in an

increasingly

market-oriented economy. There

are

several reasons

for

this. Expecta-

tion damages allow contracting parties

to

treat promises about

the

future

as

present values.

In a

complex market economy where actors

must plan

far in

advance

and

coordinate many

factors

in

order

to

pro-

duce goods

and

services, expectation damages provide

a

measure

of

certainty

in the

planning process. Mere reliance

or

restitution damages

2

L.L. Fuller

&

W.R. Purdue, "The

Reliance

Interest

in

Contract

Damages"

(1936)

46

Yale

L.J.

52.

3 M.

Horwitz,

The

Transformation

of

American

Law,

1780-1860

(Cambridge,

Mass.:

Harvard

University Press, 1977);

A.W.B.

Simpson, "The Horwitz Thesis

and the

History

of

Contracts" (1979)

46 U.

Chi.

L.

Rev. 533;

PS.

Atiyah,

The

Rise

and

Fall

of

Freedom

of

Contract

(New

York:

Oxford

University

Press,

1979).