Compensation for Harm to Economic Interests

• Author: Jamie Cassels
• Pages: 17-72

17

CHAPTER 2

COMPENSATION

FOR HARM TO

ECONOMIC INTERESTS

A. INTRODUCTION

This chapter canvasses the principles of recovery for harm to economic

interests. The chapter focuses primarily upon contract law, since con-

tract is the primary means by which persons establish economic rights.

However, tort law also offers protection against economic loss. For ex-

ample, the action for deceit or fraud is of ancient origin. More recently,

the protection of economic interests in tort has been further extended

through the development of the tort of negligent misrepresentation and a

cautious 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 often works differ-

ently in contract and tort. Since contracts c reate expectations about the

future, the standard measure of recovery is expectation damages. Tort

law protects interests in the present, and the primary measure of dam-

ages is the reliance or restoration measure. This chapter considers the

principles regarding both measures of damages.

REMEDIES: THE LAW OF DAMAGES18

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, 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 h ave been

in if the contract had been performed.1

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 oc-

cupied, had the contract been performed, 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

losses to the plaintiff associated with the contract, the expectation

measure of damages will be calculated 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 affected the plaintiff’s pos-

ition even absent the defendant’s breach. 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 plain-

tiff (assuming that the plaintiff has not pre-paid). Giving this amount

in damages will put the plaintiff in the same position f‌inancially as

though he had received the goods. On other occasions, the plaintiffs

will have incurred additional consequential losses 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 situa-

tion above, if the plaintiff h ad arranged and paid for transportation for

the expected goods, the damages award would also have to include

1 [1911] AC 301 at 307 (PC); see also Robinson v Harm an (1848), 1 Exch 850 at

855, Parke B.

Compensation for Ha rm to Economic Interests 19

that 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 h ave lost an opportunity to make a prof‌it. The

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 i s wrong and that unjustly

acquired gains should be disgorged. The reliance intere st similarly 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 her word,

any losses suffered should be compensated. But the expectation inter-

est goes much further and gr ants to the plaintiff compensation not only

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

def‌ined in terms 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 the emergence of expect-

ation damages as the standard measure of damages in contract law.3

There is some consensus that the development was related to the grow-

ing prominence of executory contracts (agreements about the future)

in an increasingly market-oriented economy. There are several reasons

for this. Expectation damages allow contracting parties to treat prom-

ises about the future as present values. In a complex market economy,

2 LL Fuller & WR P urdue, “The Reliance Interest in Cont ract Damages” (1936)

46 Yale LJ 52.

3 Morton Horwit z, The Transformatio n of American Law 1780–1860 (Cambridge,

MA: Har vard University Press, 1977); AWB Simpson, “The Hor witz Thesis

and the Histor y of Contracts” (1979) 46 U Chicago LR 533; PS Atiya h, The Rise

and Fall of Freedom of Contract (Oxford: Claren don Press; New York: Oxford

University P ress, 1979).