Expectation Damages or Reliance Damages?

A recent Commercial Court decision has addressed the question of whether a party to a contract that has been breached can recover wasted expenditure where an award of damages on that basis would put that party in a better position than it would have been if the contract had been performed.

The facts of the case arose out of a charterparty under which the ship-owner was required to modify the vessel prior to delivery. After these costs had been incurred, it became clear that the charterer would not be able to perform the contract. The circumstances were unusual as the market rate of hire was higher than the charterparty rate of hire. As a result of the breach the ship-owner was able to trade the vessel at the higher market rate. Nevertheless, the owner claimed damages in respect of the expenses incurred in modifying the vessel, despite the fact that they had more than recouped the losses claimed.

In making its decision, the court confirmed that a party pursuing a claim for breach of contract is able to claim damages in different ways: 'expectation damages' for loss of profits or 'reliance damages' for wasted expenditure. This is relevant where a contract would have been loss-making for the claimant or where he cannot prove what profit he would have made. In those circumstances, there is no lost profit to claim.

However, damages awarded for wasted expenditure are still subject to the central principle that the claimant is to be placed in the same situation as if the contract had been performed and an award of damages for breach of contract should not put the claimant in a better position than he would have been had the contract been performed.

The result is that where a claimant incurs wasted expenditure but is enabled (by reason of the breach and subsequent mitigation) to make a greater profit (or lower loss) than would have been the case if the contract had been...