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).
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