Compensation for Harm to Economic Interests

• Author: Jamie Cassels/Elizabeth Adjin-Tettey
• Profession: Professor of Law, Vice President Academic, and Provost, University of Victoria/Professor of Law, University of Victoria
• Pages: 15-64

15

CHA PTER 2

COMPENSATION

FOR HAR M TO

ECONOMIC INTERESTS

A. INTRODUCTION

This chapter canvasses the principles of recovery for harm to economic

in tere sts . The cha pter foc use s pr ima ril y up on con tra ct l aw, si nce cont rac t

is the prim ary means by which pers ons establi sh economic rights. How-

ever, tort law al so offers protection against economic los s. For example,

the action for deceit or fraud is of ancient orig in. More recently, the pro-

tection of economic interests in tor t has been furt her extended t hrough

the development of the tort of negligent misrepresentation and a cautious

expansion of recovery of economic losses c aused by negligence.

At one level of genera lity, there is no real difference i n the way in

which dam ages are calculated in contract and tort. Both are based on

the principle of restitutio in integr um — that the pla intiff is to be made

whole. This is accomplished by awarding a sum of money that will put

the pla intiff in the po sition as though the wrong had not been done.

However, in application, this principle often works differently in con-

tract and tort. Since contracts create expectations about the future, the

standard measure of recovery is expectation damages. Tort law protects

interests in the present and the primary measure of damages is the

reliance or restoration measure. This chapter considers the principles

regarding both measures of damages.

REMEDIES: THE L AW OF DAMAGES16

B. BREACH OF CONTR ACT:

THE EXPECTATION MEASUR E

1) Introduction

The o rdin ary m easu re of d amage s in ac tion s for bre ach of contr act is the

expectation measure. Expectation damages are forward-ooking. They

do not merely compen sate 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 plaint iff in the

pos itio n she w ould have been in ha d the cont ract been perf orme d. In the

case of Wertheim v. Chicoutimi Pulp Co., for ex ample, the court stated:

[I]t is the general intention of t he law that, in giving damages for

breach of contr act, the party compla ining should, so far as it ca n be

done by money, be placed in the same position as he would have been

in if the contract h ad been performed.1

Expectation damages are designed to secure for the plai ntiff the

benef‌it of the contract. Most generally, they can be calculated by deter-

mining the difference between the position that the plaintiff would have oc-

cupied, had the contract been per formed, and the position that the plaintiff

is actually in as a result of breach or non-performance of the contract.

Sometimes, when there are no consequential or out-of-pocket loss-

es to the plaintiff associated with the contract, the expectation measure

of damages will be calcul ated simply by reference to the net gain that

the plaintiff would have obtained as a result of the contract, subject

to contingencies that would have af fected the plaintiff ’s position even

absent the defendant’s breach. For example, if the contract is for the

sale of goods at $100, and at the ti me the defendant fai ls 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 pre-paid). Giving this amount in damages wil l put

the plaintiff (f‌inancially) in the same position as though he h ad re-

ceived the goods. On other occ asions, the plaint iffs will have incurred

additional consequential losse s that must also be compensated if they

are to be put in the position they would have been in had the contract

been performed. For example, in the situation above, if the plaintiff

had ar ranged and paid for transportation for the expected goods, t he

damages award would also have to include t he wasted expenditure.

1 [1911] A.C. 301 at 307 (P.C.); see also Ro binson v. Harman (1848), 1 Exch. 850 at

855, Parke B.

Compensation for Ha rm to Economic Interests 17

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 m ake a prof‌it. The extent to which these

additional consequential losse s are recoverable is discussed in gre ater

detail below.

2) Why Are Expectation Damages the Standard Measure

in Contract Law?

Much legal scholarship ha s been devoted to the question of why con-

tract law should protect the expectation interest. It has been observed

that the mora l 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 di sgorged. The relia nce interest similarly rests

upon a widely shared moral sentiment that injuries suffered by reason

of a broken promise or mi srepresentation should be made whole; that

if a person relies upon another and t he other fails to keep her word,

any losses suffered should be compensated. But the ex pectation inter-

est goes much f urther and grants to the plaintiff compensation not only

for the loss suffered, but the gain a nticipated. The plaintiff’s “loss” is

def‌ined in term s of something he 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 t he emergence of expecta-

tion damages as the standard measure of damages in contract.3 There

is some consensus 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. Expectation damages allow contracti ng part ies to treat promises

about the future a s present values. In a complex market economy where

2 L.L. Fuller & W.R. Purdue, “The Rel iance Interest in Contract Da mages” (1936)

46 Yale L.J. 52.

3 Morton Horwit z, The Transfor mation of American Law 1780–1860 (Cambridge,

MA: Har vard University Press, 1977); A.W.B. Simpson, “The Horwitz Thes is

and the Histor y of Contracts” (1979) 46 U. Ch icago L.R. 533; P.S. Ati yah, The

Rise and Fall of Freedom of Contract (Oxford: Cla rendon Press; New York: Oxford

University Pre ss, 1979).