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Mallesons clients who are customers under IT supply contracts.

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Cheng Lim  
Partner
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Recovering loss of bargain damages

In a UK Court of Appeal ruling handed down on 13 February 2009, a customer, after terminating a contract with a supplier, was able to recover loss of bargain damages in addition to amounts already recovered under the contract’s agreed termination and repayment provisions.

While this is not new law, it is a salutary reminder to customers that a well-drafted contract can protect the right to recover substantial loss of bargain damages.

Facts and Analysis

The supplier, Shipyard Stocznia Gdynia (Shipyard), failed to build three ships for Gearbulk Holdings (Gearbulk) as required by the relevant contracts. Because none of the ships were ever delivered, Gearbulk terminated the contract for each ship and exercised its rights under the termination and repayment provisions contained in the contracts to recover the purchase price pre-payments it had already made to the supplier.

The contracts also contained agreed damages provisions which provided for the payment of liquidated damages for certain specified breaches, such as delay in delivery and deficiencies in capacity and performance.

Gearbulk also sought loss of bargain damages (ie damages that represent the difference between the contract price and the market price at the time of the breach) on the basis that the supplier repudiated the contracts by failing to deliver the ships.

Shipyard disputed Gearbulk’s entitlement to recover loss of bargain damages in addition to purchase price pre-payments, contending that that Gearbulk had no right to seek such damages because Gearbulk had affirmed the contracts by exercising its contractual rights (to terminate and to recover pre-payments). Shipyard also argued that the agreed damages provisions in the contracts operated as a complete code and that they displaced any right of Gearbulk to treat the contracts as repudiated and claim damages for loss of bargain.

The Court of Appeal rejected Shipyard’s arguments, finding that Gearbulk retained its right to seek loss of bargain damages because:

  • the parties clearly intended that the repayment provisions of the contract should survive termination and that Gearbulk’s exercise of its rights under those provisions did not, under the circumstances, amount to an election to keep the contracts on foot
  • Gearbulk’s exercise of its contractual right to terminate the contracts operated to discharge the contracts with the same consequences as if they had been discharged by repudiation, and
  • the agreed damages provisions provided an agreed measure of compensation for certain breaches of the contracts but, in the circumstances of this case, did not exclude Gearbulk’s right to recover damages at common law for the loss of its bargain.

Australian Position

The Australian position on loss of bargain damages is very similar to that of the UK.

When termination is based on repudiation or breach of an essential term, there is a presumption that loss of bargain damages are available. Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260.

If there is an agreed damages clause, and loss of bargain damages are sought over and above what it provides, the plaintiff must establish a repudiation or a breach of an essential term of the contract. Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 at 28-9.

Key Lessons

There are a number of lessons to take away from the Court of Appeal’s ruling.

Ensure that the contract reserves the right to seek loss of bargain damages

Agreed (or liquidated) damages clauses should be carefully drafted to ensure that they do not operate to exclude your right to seek loss of bargain damages. For example, a provision imposing liquidated damages for late delivery should make clear that it is compensating the customer only for the losses associated with delay.

Termination letters should also explicitly reserve the right to pursue loss of bargain damages:

  • if you exercise a termination right, ensure that when communicating with the supplier you explicitly reserve your rights to pursue loss of bargain damages, and
  • this is important, despite the fact that the Court of Appeal held that relying on a termination clause does not affirm a contract (contrary to Shipyard’s arguments), as consistently using language reserving your right to pursue such damages will strengthen a claim that the parties consistently agreed, at every stage of the engagement, that termination and repayment provisions in the contract did not displace additional common law damages.

Craft clauses defining fundamental breaches carefully:

  • loss of bargain damages are recoverable only where the contract is terminated for fundamental (or “repudiatory”) breach. In the absence of contractual precision about the status of a particular breach, there is ample opportunity for uncertainty.
  • in light of this, the agreement should identify breaches (eg failure to deliver major deliverables in accordance with deadlines) which will justify immediate termination and recovery of pre-payments. Those rights should be specifically identified in the contract as being cumulative with all other remedies.
This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.